ASX Limited operates Australia's only licensed clearing and settlement system, earning 55% of revenue from statutory monopoly infrastructure. At A$54.44 versus fair value A$61.94, the stock trades 14% below intrinsic worth. The key driver is margin recovery as temporary inquiry costs fade from FY28, releasing A$30 million in annual earnings while capex normalisation unlocks A$60 million of free cash flow.

Income and thematic investors find the best fit here. The monopoly generates predictable cash flows supporting sustainable dividends while simultaneously capturing every dollar of growth in Australia's A$4.1 trillion superannuation system and rapidly expanding ETF market. The defensive yield provides downside protection while structural tailwinds compound volume growth regardless of execution quality.

ASX Limited operates Australia's financial market infrastructure, holding statutory monopoly licences for clearing and settlement that generate 55% of revenue with 100% market share. The company also runs cash equity and derivatives exchanges (facing limited competition from Cboe Australia), provides market data and connectivity services, and charges listing fees to 2,100 entities. Revenue splits across Markets (32%), Securities & Payments (25%), Technology & Data (25%), and Listings (18%).

Recent performance reflects cyclical peak activity offset by elevated costs. First-half FY26 revenue rose 20% to A$603 million as interest rate volatility drove cash equity trading up 23% and futures volumes up 10%. However, EBIT margins compressed to 56% from a historical peak of 67% as ASIC inquiry costs (A$25–35 million annually) and CHESS investment spending (capex running at 14% of revenue) squeezed profitability. Return on equity of 13.5% remains above the 12.5% regulatory target but trails the 15–17% historical range.

The investment case centres on margin normalisation post-inquiry and free cash flow expansion post-CHESS. As temporary inquiry costs fade by FY28 and capex declines from A$175 million to A$110 million, EBIT margins mechanically recover 200 basis points while free cash flow conversion improves from 75% to 83% of EBITDA. The monopoly's durability (no competitor licensed in 37 years) supports this recovery, though execution risk remains given the CEO departure and CHESS delivery uncertainty. At A$54.44 versus fair value A$61.94, the stock is 14% undervalued.

What happened?

First-half FY26 delivered revenue growth of 20% to A$603 million as elevated market activity compensated for margin compression. Cash equity trading surged 23% and futures volumes rose 10%, both driven by interest rate uncertainty following the RBA's unexpected February 2026 hike to 3.85%. EBITDA margins held at 62% despite inquiry costs and technology investment running at peak levels. Net interest income contributed A$40 million (annualised A$80 million) from participant collateral and own cash holdings. The statutory clearing and settlement business maintained 100% market share while cash trading share slipped modestly to 82% as Cboe gained ground.

What's next?

Revenue growth moderates to 6.4% in FY27 as cyclically elevated trading volumes normalise toward 5–6% annual growth, closer to GDP-plus levels. EBITDA margins begin recovering toward 63% as inquiry costs fade while capex peaks. The critical catalyst is CHESS Release 1 go-live in April 2026—success validates the A$306 million software investment and removes execution overhang, while failure triggers write-downs and regulatory escalation. The ASIC Federal Court hearing in June 2026 determines penalty exposure (A$30–80 million range). CEO appointment in H2 CY2026 signals execution capability for the next phase. From FY28 onward, capex normalises below A$120 million (versus A$175 million currently), driving free cash flow expansion and supporting payout ratio restoration toward 85%. Structural tailwinds from superannuation flows (A$4.1 trillion compounding) and ETF adoption (FUM up 34% year-on-year to A$321 billion) provide multi-year revenue visibility independent of cyclical activity.

What could go wrong?

The largest risk is structural cost permanence. Our base case assumes inquiry costs (A$25–35 million annually) fade by FY28 and technology spending normalises, allowing EBIT margins to recover 200 basis points to 58%. If Accelerate program costs and elevated compliance spending become the new baseline rather than transient investments, margins settle at 55% instead. This would reduce fair value by approximately 8% to A$57 per share, cutting upside to just 5%. The trigger is FY27 operating expense growth exceeding 8% ex-inquiry—signalling that management cannot extract cost discipline post-projects. Early warning signs appear in the August 2026 full-year results when management provides FY27 expense guidance. Combined failure probability across regulatory escalation, CHESS delivery issues, and cost permanence totals approximately 45%, warranting moderate rather than high conviction position sizing.