We raise our fair value estimate for wide-moat ASX ASX by 3% to $77 with first-half fiscal 2025 results. The exchange showed the first signs of stabilization in cost growth, an issue since the botched replacement project for its clearing system. Combined with 6% growth in operating revenue on the previous corresponding period, due to high volatility around the US election, underlying net profit after tax grew a solid 10% on the PCP. Shares rallied on the news of cost containment but remain undervalued and not reflective of the exchange’s long-term margin potential. The exchange declared an $1.11 per share dividend for the period.

Cost growth has been the main market concern for the exchange as the failed Chess replacement caused significant reputational damage. As a result, the exchange has attracted a lot of regulatory scrutiny in recent years, which could potentially risk the regulatory exclusivity it enjoys in many of its activities. Under new management, the exchange has decided to invest heavily to retain its social and regulatory license to operate. This investment included compensation payments to market participants for the failed project, capital expenditures on a new replacement of Chess, maintenance spending to keep the aging Chess infrastructure stable, and investment into improving the exchange’s other systems. We believe sacrificing short-term profitability to protect the exchange’s licenses, which are one of its moat sources, is the correct strategic decision.

Cost growth stabilizing

We expect Australian Securities Exchange's near- and medium-term strategic focus to be on protecting its economic moat in cash equity clearing and settlement. ASX has long been protected from competition through various exclusive licences to clearing and settlement, which we consider a source of its economic moat, based on intangibles.

However, over the past decade, ASX has faced increasing calls from the federal government, regulators, and industry bodies for more competition. In response to these calls, ASX attempted to deliver a world-leading new clearing system, based on blockchain. However, after several years of delays and cost overruns, this project has been shelved, which has renewed discussion on opening up the clearing and settlement market to more competition. ASX, we believe, will therefore focus on trying to demonstrate to the federal government, regulators, and industry bodies that it is capable of maintaining smooth operations of Australia’s financial infrastructure, including by increasing spending on its various systems. Regardless of the potential regulatory outcome, cash equity clearing and settlement make up only around 15% of ASX’s revenue. Moreover, we believe that even if cash equity clearing and settlement would be opened up to competition that ASX’s business would remain well protected due to network effects inherent in ASX’s clearing business. We therefore do not expect significant changes to ASX’s cash equity clearing and settlement market share or margins in the foreseeable future.

ASX bulls say

  • ASX is a vertically integrated exchange with a wide economic moat based on network effects and intangibles.
  • ASX benefits from exposure to Australia’s outsize natural resources sector and the energy transition will continue to fuel demand for ASX’s listing services.
  • Volatility will increase demand for ASX’s trading and clearing services, especially for companies in the highly volatile materials and energy sectors, which make up around half of total listings.

ASX bears say

  • ASX has failed to adequately secure its economic moat based on regulation and now risks increased competition and costs.
  • ASX has not yet presented a credible plan to replace its ageing clearing system.
  • Uncertainty in financial markets may negatively affect ASX’s listings business, which is disproportionately large compared with peer exchanges.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.