Aust Securities Exchange: As expected now all eyes on project delivery

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
20 August 2021, 10:00 AM
Sectors Covered:
Diversified Financials

  • Aust Securities Exchange (ASX:ASX) reported underlying NPAT of A$481m (-6% on pcp) which was broadly in line with consensus and our expectations.
  • In our view, a broadly positive result with 3 out of the 4 business divisions showing year on year revenue growth (Derivatives and OTC markets being the negative).
  • Expense growth guidance (+5%-7%) and capex (A$105m-A$115m) suggests the hopeful peak in investment spend by ASX over recent periods.
  • We alter FY22F/FY23F EPS BY ~1%-2% on revised earning assumptions. Our price target increases to (login to view) on the above changes and a valuation roll-forward. Trading on ~33x FY22F PE, we see the stock as fully priced. Reduce. With this note, coverage of ASX transfers to Steven Sassine.

FY21 result summary

Aust Securities Exchange (ASX:ASX) reported operating revenue of A$951m (+1.4% on pcp) which was ~2% above expectations. Revenue growth was seen across 3 out of the 4 ASX business units, with strong performances from ‘Listings and Issuer Services’ (A$258m, +9% on pcp), ‘Equity Post-Trade Services’ (revenue of A$144m, +13% on pcp) and Trading Services (revenue of A$265m, +3% on pcp).

Underlying NPAT of A$481m (-~6% on pcp) was also broadly in line with expectations. Expense growth (+8.4%) and FY21 capex (~A$110m) were both within management guidance. A 2H21 dividend of 111.2cps fully-franked was declared (90% payout).

What we liked in the result

Listings and Issuer services had a strong year with revenue up ~9% on pcp, driven by: 176 new listings (highest number since FY08) with a combined market cap of ~A$41bn; and higher issuer activity leading to a substantial increase (+32% on pcp) in CHESS statements.

Trading Services saw ~3% revenue growth primarily driven by the elevated demand for information services (e.g. market data distribution and increased index royalties from S&P due to heightened retail activity).

FY22 expense growth guidance of 5%-7% points to a moderating expense growth profile for ASX as it cycles a recent period of heightened expenses (e.g. Building Stronger Foundations program).

Areas of caution

The Derivates and OTC business underperformed with revenue of A$285m (-10.4% on pcp), with the RBA’s yield curve control leading to a fall in short-term rates volumes. This was offset to a degree by the new 5-year bond product and strong growth seen in the 10-year instrument (+15% on pcp).

Equity options revenue fell 37% on pcp to ~A$12m (index options volume down ~46% on pcp and single stock options volume down ~14% on pcp).

Cash market trading revenue was down 5% on pcp due to lower on-market trading values (A$5.8bn per day. ~-4% on pcp) along with Auctions and Centre Point values being down 11.5% on pcp (higher margin products).

Net interest income was -44% on pcp due to lower average investment spreads (13bps vs 37bps in pcp), offset to a degree by a 14% rise in balances to A$12.2bn.

FY22 Capex guidance points to another year of elevated spend (A$105m – A$115m), although management suggests this should be the peak of recent elevated investment spend, with it expected to normalise post major works completion (e.g. DLT/Sympli).

Changes to forecasts and Investment view

We make nominal changes to our FY22F/FY23F EPS by ~1-2% on revised earnings assumptions. Our price target increases marginally to (login to view) on the above changes and a valuation roll-forward.

ASX is a quality company in our view and continues to deliver strong results. We also note the longer-term optionality of revenue diversification from new adjacencies and the recent larger technology projects. However, given its mid-single digit EPS growth profile, we believe the stock remains expensive (~33x FY22F PE). We maintain our Reduce recommendation.

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