Investment Outlook

Neutral stance reflecting balanced risk-reward profile

Investment Outlook

ASX Limited presents a balanced investment proposition with a neutral outlook, reflecting the company's strong competitive position offset by significant execution risks. Our base case valuation of $47.50 represents modest 5.6% upside to the current share price of $45.00, suggesting the market has appropriately priced both opportunities and challenges.

The company demonstrates exceptional operational strength, delivering record operating revenue of $541.9 million (+5.9% YoY) while maintaining expense discipline during a substantial technology investment phase. ASX's diversified business model provides resilience, with strong performance in Markets (+9.9%) and Technology & Data (+6.7%) offsetting challenges in Listings.

However, the $375-445 million CHESS Replacement project through 2029 represents both ASX's greatest opportunity and risk. Successful implementation would secure competitive positioning for decades, while failure could result in significant financial and reputational damage. Regulatory headwinds, including ASIC investigations and potential competition in clearing and settlement, add further uncertainty.

For long-term investors, ASX offers exposure to Australia's financial markets growth, data monetization trends, and environmental markets development, with execution of technology modernization being the critical value determinant.

Executive Summary

Strong operational performance amid technology transformation

Operating Revenue
$541.9m
+5.9% YoY
EBIT Margin
59.3%
+240bps
Underlying ROE
13.5%
+90bps
Target Price
$47.50
+5.6% upside

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.

Company Overview

Australia's dominant financial market infrastructure provider

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.

Latest Results

1H25 results demonstrate operational strength during investment phase

Segment1H25 RevenueYoY Growth% of TotalKey Drivers
Listings$104.9m0.0%19.4%Annual listing fees offset IPO weakness
Markets$168.4m+9.9%31.1%Interest rate volatility driving futures volumes
Technology & Data$132.9m+6.7%24.5%Growing data consumption and ALC services
Securities & Payments$135.7m+5.2%25.0%Higher clearing volumes and Austraclear growth

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.

Expense Management Excellence

Total expenses declined 0.2% to $220.3 million despite inflationary pressures, reflecting successful cost discipline initiatives including targeted restructuring (saving ~$11 million annually) and reduced consultant spending. This drove EBIT margin expansion of 240 basis points to 59.3%.

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.

Financial Forecasts

Balanced growth with improving cash flow conversion

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.

MetricFY25EFY26EFY27EFY28EFY29E
Revenue ($m)1,0901,1531,2041,2521,296
EBIT Margin60.0%60.9%61.4%61.8%62.0%
ROIC6.1%6.5%6.8%7.1%7.4%
FCF ($m)326363396451498
FCF/NOPAT72%74%76%83%89%

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.

Valuation Analysis

Multiple methodologies support fair value assessment

MethodologyImplied PriceWeightNotes
DCF - Base Case$47.5065%Primary methodology
EV/EBITDA Multiple$46.7520%12.8x forward multiple
P/E Multiple$46.1010%20.5x forward multiple
Precedent Transactions$49.255%Strategic premium
Weighted Fair Value$47.50100%5.6% upside

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.

Bull Case

$52.70
  • 6.0% revenue CAGR
  • 63% EBIT margins
  • Successful CHESS delivery

Base Case

$47.50
  • 4.5% revenue CAGR
  • 62% EBIT margins
  • Moderate execution challenges

Bear Case

$42.05
  • 3.0% revenue CAGR
  • 58% EBIT margins
  • Significant CHESS delays

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.

Risk Analysis

Technology execution and regulatory challenges dominate risk profile

High

Technology Modernization Execution

Impact: $375-445 million CHESS Replacement through 2029 represents substantial execution risk

Mitigation: Phased implementation approach with experienced partners TCS and Accenture

High

Regulatory and Legal Challenges

Impact: ASIC investigation and civil proceedings create uncertainty around penalties and operational changes

Mitigation: Transparent cooperation with regulators and strengthened risk management framework

Medium

Investment Return Risk

Impact: Substantial capital expenditure may not deliver expected returns on invested capital

Mitigation: Disciplined capital allocation approach and regular project milestone reviews

Medium

Competitive Threats

Impact: Potential competition in clearing and settlement could pressure high-margin businesses

Mitigation: Technology leadership and superior service quality to maintain market position

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.