ASX Limited delivered record half-year operating revenue in 1H25, demonstrating the resilience of its diversified business model during a significant technology investment phase. Strong performance across Markets (+9.9%), Technology & Data (+6.7%), and Securities & Payments (+5.2%) more than offset flat Listings revenue, while disciplined expense management (-0.2% YoY) drove margin expansion.

The company's value proposition hinges on successful execution of its technology modernization program, particularly the CHESS Replacement project with Release 1 targeted for 2026 ($105-125 million) and Release 2 for 2029 ($270-320 million). This substantial investment represents both opportunity and risk, with potential to either secure ASX's competitive position or result in significant financial damage.

Regulatory challenges add complexity, with ASX facing ASIC investigation into the December 2024 CHESS Batch Settlement incident and civil proceedings regarding previous CHESS project statements. Legislation potentially opening clearing and settlement to competition creates medium-term structural risks to high-margin businesses.

Our neutral outlook reflects ASX's strong market position and high-quality earnings balanced against execution risks and regulatory uncertainties. The company's improving financial metrics (underlying ROE of 13.5% within target range) and projected free cash flow inflection post-FY27 support long-term value creation, contingent on successful technology implementation.

ASX Limited operates Australia's primary securities exchange and serves as critical financial market infrastructure for Australia and New Zealand. As a multi-asset class and integrated exchange group, ASX provides comprehensive services across listings, trading, clearing, settlement, registry, and information services. The company holds essential market licenses under regulatory oversight from ASIC and the RBA, positioning it as fundamental to Australia's economic framework.

ASX generates revenue through four primary business lines representing distinct value propositions. Listings (19.4% of revenue) earns fees from annual listings, IPOs, and capital raisings. Markets (31.1% of revenue) benefits from futures/OTC clearing and cash market trading. Technology & Data (24.5% of revenue) provides information services and technical connectivity. Securities & Payments (25.0% of revenue) offers clearing, settlement, and registry services.

The company operates as a regulated monopoly in many services, providing critical infrastructure where reliability and regulatory compliance are paramount. ASX's customers span listed entities seeking capital, market participants including brokers and investment banks, and institutional and retail investors. The business model generates significant net interest income from cash balances and participant collateral.

Helen Lofthouse leads as Managing Director and CEO, executing the five-year "New Era" strategy focused on technology modernization. The leadership team includes CFO Andrew Tobin and newly appointed CRO Dirk McLiesh, supported by an experienced Board. Management is navigating significant technology initiatives while maintaining operational excellence and regulatory compliance in Australia's financial system infrastructure.

ASX delivered record operating revenue of $541.9 million in 1H25, up 5.9% year-over-year, demonstrating the strength of its diversified business model. The Markets segment led performance with 9.9% growth driven by elevated futures trading volumes (+19.9%), particularly in interest rate derivatives as global monetary policy uncertainty drove increased hedging activity. Cash market trading revenue also performed strongly, up 11.3% as average daily traded value rose to $5.6 billion.

Technology & Data continued its growth trajectory with 6.7% revenue increase, reflecting higher demand for market data products and technical services at the Australian Liquidity Centre. Information Services revenue grew 8.2% as customers increased consumption of equities and derivatives data. Securities & Payments delivered solid 5.2% growth, with Austraclear particularly strong at 10.8% growth following increased debt market activity.

The Listings business remained flat despite challenging capital markets conditions, with annual listing fee growth and investment products revenue (+24.4%) offsetting declines in initial listings and secondary raisings. While 39 new entities listed (+39.3% YoY), market capitalization of new listings fell 73.2% to $8.9 billion, reflecting the quality mix of new entrants.

Financial metrics improved significantly, with underlying NPAT up 10.1% to $253.7 million and underlying ROE increasing 90 basis points to 13.5%, well within the target range of 13.0-14.5%. The interim dividend increased 9.9% to 111.2 cents per share, maintaining the 80-90% payout ratio policy while funding substantial technology investments.

Our financial forecast projects ASX achieving a 4.5% revenue CAGR through FY29, with growth moderating from 5.7% in FY26 to 3.5% by FY29 as interest rate volatility potentially normalizes. The Markets segment is expected to outperform with 5-7% growth driven by continued derivatives activity, while Technology & Data should deliver 6-8% growth from data monetization and new product development.

EBIT margins are projected to expand gradually from 59.3% in 1H25 to approximately 62% by FY29, reflecting operational leverage and efficiency gains from technology investments. However, depreciation expenses will increase as major capital projects are completed, with D&A rising from 3.8% of revenue to 5.3% by FY29.

Capital expenditure remains elevated at $160-180 million annually through FY27 to fund the CHESS Replacement and other technology initiatives, before declining to $130 million by FY29. This profile drives substantial improvement in free cash flow conversion, rising from 71% of NOPAT in FY25 to 89% by FY29, creating significant financial flexibility for increased shareholder returns or strategic investments.

Our primary DCF valuation yields a base case fair value of $47.50 per share, incorporating a 4.5% revenue CAGR, gradual EBIT margin expansion to 62%, and a terminal growth rate of 2.7%. The WACC of 9.6% reflects ASX's strong financial position (AA- credit rating) balanced against technology execution risks and regulatory uncertainties.

Multiple-based approaches provide validation, with EV/EBITDA and P/E multiples suggesting values of $46.75 and $46.10 respectively. ASX currently trades at 20.5x forward earnings, a slight discount to the global exchange operator average of 21.0x, reflecting both strong competitive positioning and execution risks.

The significant divergence between bull ($52.70) and bear ($42.05) cases highlights the binary nature of key risks, particularly CHESS implementation success. Our probability-weighted value of $47.55 reflects assessed likelihoods of 60% base case, 20% bull case, and 20% bear case scenarios.

The terminal value calculation assumes normalized free cash flow of $770 million by FY30, implying a terminal EBITDA multiple of 11.5x, which appears reasonable relative to global exchange operator multiples. Sensitivity analysis shows relatively small changes in WACC or terminal growth assumptions can significantly impact valuation, emphasizing the importance of successful technology modernization execution.

ASX faces significant technology modernization execution risk with the CHESS Replacement project extending to 2029. While management has strengthened its approach with experienced partners, the complexity and industry-wide impact create substantial risk of delays, cost overruns, or functionality issues that could impact financial performance and competitive positioning.

Regulatory challenges include ASIC's investigation into the December 2024 CHESS Batch Settlement incident and civil proceedings regarding previous CHESS project statements. These create uncertainty around potential financial penalties, remediation costs, and mandated operational changes, while legislation potentially opening clearing and settlement to competition threatens historically high-margin businesses.