Australia | Jul 07 2021
This story features ASX LIMITED. For more info SHARE ANALYSIS: ASX
The business position of ASX remains strong as does cash flow, while there is potential upside in the future from rising interest rates
-Annual listing fees should increase as a result of strong equity markets
-Increased volatility at the short end of the interest-rate futures market
-Listings revenue and derivatives should provide long-term growth for ASX
By Eva Brocklehurst
Amid headwinds to interest income and derivatives ASX Ltd ((ASX)) managed a mixed trading outcome to end the second half. The company's business position remains strong as does cash flow while there is potential in the future from rising interest rates.
That said, volumes for both cash equities and futures fell markedly in the second half, while capital raising was affected by subdued secondary listings. The smoothing of revenue over multiple years should largely insulate the balance sheet from any major impact in this regard, Citi suggests, while UBS considers IPO activity a bright spot.
The exchange's $12.6bn of initial capital raisings leads to an increase in revenue forecasts for listings. Annual listing fees should increase as a result of the significant rise in equity markets through to May 31, 2021.
The drop in cash value in the second half did come off a record high and hence it was always going to be difficult to match. Still, the final outcome was worse than Citi expected, with a -27% fall for June. Futures volumes have fallen -14% compared with the prior June.
UBS believes derivatives are starting to show some spark, with interest-rate futures up 8%. Within this, the ten-year bond is relatively flat and growth has been driven by 90-day bank bill futures, which were up 77%.
This suggests increased volatility at the short end of the curve. Nevertheless, UBS notes the three-year bond futures were relatively flat, despite the increased volatility. As a result, the broker remains cautious about the outlook for futures volume growth.
The stock appears to be expensive now and Citi downgrades to Sell from Neutral. The business may be high-quality and have stable earnings but the growth outlook is subdued, Credit Suisse adds, although trading on 30x FY22 estimates, the stock is considered fair value and the broker's Neutral rating is reiterated.
A more positive case could be found for the longer-term, Credit Suisse acknowledges, and investors may consider this is a reasonable entry point for a quality business that is cyclically depressed in some areas.
Ord Minnett considers ASX an "infrastructure-like" stock, albeit trading on rich multiples. Earnings growth into FY22 is expected, led by annual listings and derivatives. The main upside is the potential from interest-rate leverage.
Total market value traded fell to $138.3bn in June, down -24%. June is a cyclically strong month so it appears to Ord Minnett the lower trading trends in terms of value have continued.
The market share for ASX in cash market trading was 82.1% compared with 82.3% a year ago. The main issue going forward, the broker asserts is the depressed volumes in derivatives, although there is signs a floor has developed.
The Reserve Bank of Australia's July statement around yield curve control is expected to affect sentiment going forward. Ord Minnett expects strong equity values and fee increases could mean annual listing fees rise 17% in FY22.
The broker estimates ASX invested $24m in the Sympli property settlement technology for a 49.5% shareholding and expects opportunities will subsequently be expanded on. Brokers also expect updates on the distributed ledger technology replacement for CHESS amid a plan to go live in April 2023.
On the positive side, Ord Minnett concludes there is reasonable long-term growth with limited competition, and earnings power from listings revenue and derivatives. Together these segments make up around 55% of revenue.
Some commentary on growth prospects is expected in the FY21 results yet whether this will sufficiently affect forecasts is questionable, in Citi's view and, on balance, unlikely. Yet the broker does anticipate an update on commodity futures as well as the Sympli investment and DataSphere, an open data platform.
FNArena's database has five Hold ratings and two Sell. The consensus target is $71.54, suggesting -5.6% downside to the last share price. Targets range from $65.87 (Morgans, yet to comment on the update) to $76.50 (Ord Minnett).
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