ASX a standout despite high price
This Australian financial services company may be expensive at its current price but has a solid reputation, good profit margins and significant competitive advantages, according to Morningstar analysis.
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.
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.
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