Late last week the ASX Ltd (ASX:ASX) hosted its big investor day, which aimed to provide some clarity on the local bourse operator’s epic telegraphing of its technology choices.

ASX Limited operates our primary national securities exchanges.

This include the provision of securities exchange services, derivatives exchange services, central counterparty clearing services, and registry, settlement, and delivery-versus-payment clearing financial products and associated ancillary services. It also provides market data services and investor education courses

ASX managing director and CEO Helen Lofthouse also updated how much the exchange will need to spend on it all over the next five years.

“Our five-year strategy builds on a high-quality portfolio of businesses that deliver resilient revenue performance throughout market cycles,” Lofthouse said.

It was tough for investors to hear, and the share price has slumped like hope, down more than 11.5% over the next two sessions.


ASX share price over the last week

Via Google


ASX share price over the last year



After the ASX chief reported the prospect of accelerating  cost and expense base, Morgans now expects capital expenditure will come in $10m higher than forecast which suggests a greater 2H24 spend.

But even with a resilient cash flow generation and almost monopolostic position, the ASX’s ongoing issues with its CHESS replacement have led  Morgans  on Monday to revise its EPS estimates for FY24 down by -2% and FY26 down -4%.

However Morgans has retained its ASX rating as Hold.

The Price Target is lowered to $61 from $62.70.


Comparatively terrible

According to UBS, the benefits of being largely a monopoly have been shown to be a negative, as under-investment and poor execution get reflected in a total return profile that ranks the ASX amongst the worst in the world.

Guidance for FY25 cost growth was 6-9%, or 4-7% if Depreciation & Amortisation (non-cash) is excluded.

This is after considering $11m savings from business rationalisation (i.e. 3% of non-project Full Time Employees cut) and lower regulatory costs.


Lofthouse outlined the ASX’s grand plans, pretty much as the slide below. Investors appeared less than impressed and voted with their feet.

As UBS notes, its big project distractions, cost and capex pressure and its competitive threats remain prevalent.

A fair few of the projections must’ve been hard to swallow.

UBS says that for Lofthouse and her team, over-earning in a monopoly position comes home to roost.

The first issue is that the company’s total expense growth rate is projected to come in between 6% and 9% for FY 2025. This comes on top of an anticipated 15% increase in FY 2024.

The primary driver for this cost blowout is ongoing spend in technology, including software licensing, equipment costs, and depreciation and amortisation.

UBS says one of the very reasons for owning an exchange is that technology adoption allows the business to scale consistent revenue growth over a largely stable cost base.

Adjusting for these items implies Business-As-Usual cost growth is actually running closer to 9-12%, materially higher than consensus (~5.5%).

The ASX has been able to generate world-leading EBITDA margins, generating the impression that it was performing well.

However, UBS says this is all largely due to significant underinvestment in technology and systems.

“This over-earning allowed ASX to generate EBITDA margins in the mid-70s vs more competitive jurisdictions where EBITDA margins are ~10 percentage pts lower.”

Over the five-year period starting in FY24, UBS estimate $750-800m in total capex, which will come down like a ton of bricks on the firm’s financial resources.

These numbers are well above market expectations and reflect the raft of major projects currently underway (but not the mythic T+1 settlement), alas.

UBS says, owning the ASX for <5% p.a. 3-year EPS growth makes little sense when you can buy, for example, the HK Exchange (Hang Seng), currently in a cyclical downturn, for a similar multiple and 3x the growth.

“Alternatively, investors could buy any other major exchange cheaper, for better growth, and now similar profitability metrics as ASX invests heavily back into the business.”

Comparative global exchanges: P/E and EPS growth (3yrs) 

Screenshot UBS


Materially Undervalued

Lofthouse said last week told investors that strong and ongoing demand for invaluable data and Australia’s giant superannuation system – the fifth largest in the world – are juts two of the significant structural tailwinds supporting the outlook for members of the ASX 200.

Ord Minnett on Friday thought this was conservative, saying shares in the ASX look  “materially undervalued.”

The broker was unmoved by the update and maintains its $75 target.

According to the broker, medium-term capex and opex growth doesn’t represent a new baseline and expects the stock will return to its previous historical operating margins over the long term.

For Ord Minnett, the ASX capex guidance for FY25 implies market cap growth of around 25% from FY24, and  expects capex to remain elevated through FY27.

The brokers at Morgan Stanley also don’t mind the spend and in contrast to UBS believe the risks facing the ASX are now more balanced.

Morgan Stanley Upgrades ASX to Equal-weight from Underweight and the target increased to $54.65 from $53.50.

MS says the ASX enjoys weighty operating leverage, potential upside earnings risk from better capital markets and in particular the broker sees improved futures trading and an incoming lift in listings activity.

MS notes that while regulatory concerns persist and although capex remains elevated, Lofthouse and her team are taking actions to bring down opex and are reducing the regularity of compliance costs.


Morgan Stanley rates ASX as Upgrade to Equal-weight from Underweight

Ord Minnett rates ASX as Accumulate

Current Price is $56.45 

MS Target Price is $54.65

Ord Minnett Target Price is $75

ASX Consensus Recommendation: Buy

ASX Consensus Price Target: $58.14