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ASX a standout despite high price

Glenn Freeman  |  18 Jul 2018Text size  Decrease  Increase  |  
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This Australian financial services company may be expensive at its current price but it has a solid reputation, good profit margins and significant competitive advantages, according to Morningstar analysis.

The latest Australian Securities Exchange (ASX: ASX) activity report indicates new company listings on the ASX in June 2018 were up 2 per cent year-on-year. It also shows there were 137 new listings in fiscal 2018, down from 152 a year earlier.

"The number of companies listed on the ASX in any given year doesn't move much. A few list each year, and a few de-list," says Gareth James, Morningstar equity analyst. This is borne out by the same report, which indicates 2285 companies were listed on the ASX as at June 2018, compared to 2239 as at June 2017.

ASX yesterday closed at $65, a 35 per cent premium to Morningstar's fair value estimate of $48. 

ASX stocks trading markets securities derivatives ETF

The ASX generates a combination of initial and annual listing fees from companies.

The volume of listings and trades on the exchange is the second-largest balance sheet contributor, responsible for 20 per cent of its group revenue. With an effective monopoly in the Australian primary-listed equity market, it generates initial and annual listing fees from companies on its exchange.

A rival exchange, Chi-X, is the sole viable alternative, but is only licensed to operate a secondary equities market, whereby only previously issued stocks, bonds, options and other financial products can be traded. This secondary market cash equities trading represents just 5 per cent of ASX's group revenue.

As such, it is regarded by Morningstar as holding a wide moat of competitive advantage.

Regulatory reform is slow

Exchange-traded securities and derivatives trading are the biggest balance sheet contributors – accounting for 46 per cent of group revenue. ASX is the only organisation licensed to operate securities clearing and settlement for these financial instruments.

"The ASX has long been protected by two significant barriers to competition through regulation and network effects," says Morningstar's James.

Though the Australian government has previously attempted to remove some of these competitive hurdles, "the process of regulatory reform is slow and still has many obstacles to overcome," James says. 

"The regulatory requirement to maintain operations and regulatory capital in Australia reduces potential synergies for overseas clearinghouses," he says, also noting there are "currently no plans to introduce competition in derivatives clearing, ASX's largest business".

Technology is also an advantage held by ASX, and a barrier to existing and potential competitors, through its control of systems linking it with local market participants, such as stockbrokers. Additionally, it holds a 19 per cent stake in IRESS – a dominant trading and financial information platform, which is itself a narrow-moat-rated company. 

James also refers to ASX's capital-light business model of the company, which is "debt free and has been for many years, a situation we expect to continue for the foreseeable future".

This underpins its consistently high dividend payout ratio, currently at 90 per cent, as does its reluctance to acquire new businesses.

 

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Glenn Freeman is senior editor, Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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