ASX delivers $456m boost but sustainability in doubt
ASX's 7 per cent growth in underlying net profit for fiscal 2018 has been attributed largely to a boost in IPO capital raisings, but Morningstar fears EPS growth rate can't last.
ASX's 7 per cent growth in underlying net profit for fiscal 2018 has been attributed largely to a boost in IPO capital raisings, but Morningstar fears EPS growth rate can't last.
On the back of this, the Australian Security Exchange's (ASX: ASX) announced final dividend of $1.09 a share for the half, up 9.3 cents a share, bringing the full-year dividend to $2.16 - 7 per cent increase on FY2017.
ASX was trading at $68.18 at the last close, above Morningstar's $49 fair value estimate
After its primary profit generator of derivatives trading, which contributes about one-third of group revenue, listings comprise about 25 per cent of total revenue. Listings increased revenue by 15 per cent over the year, ahead of Morningstar's 9 per cent forecast but in line with guidance.
"The main reason for the strong performance was a 46 per cent increase in capital raisings versus the prior year, reflecting buoyant market conditions," says Morningstar senior equity analyst, Gareth James.
ASX management sees a strong pipeline of further listings into fiscal 2019, according to CEO, Dominic Stevens. These include several high-profile demergers announced throughout the year, including Commonwealth Bank of Australian (ASX: CBA) and Wesfarmers (ASX: WES).
However, Morningstar's James "doesn't believe the current cyclical strength in capital markets reflects a structural growth trend for ASX".
"We still forecast mid-single-digit revenue and underlying earnings compound annual growth over the next decade.
"One of the reasons for our bearish view on ASX over the past couple of years is that we don't believe the share price rise has been supported by a sustainable improvement in the EPS growth outlook," James says.
A key challenge for ASX is driving continued growth in its earnings "beyond the mid-single-digit EPS growth generated by its Australian listed securities businesses," he says.
Offshore tech no silver bullet
Management highlighted anticipated growth in the number of overseas technology companies but James remains sceptical. Stevens referred to New Zealand accounting software company Xero (ASX: XRO) as a highlight – though James says such listings will be the exception rather than the rule.
"We still expect most new technology company listings on the ASX to be relatively small and speculative, and we anticipate that the main source of new listings will remain Australian companies, with a skew towards the resources sector.
"We also see the ASX as more vulnerable to losing listings to overseas exchanges than attracting listings from them, in part due to the relatively small size of the technology sector in Australia," James says.
Regardless, the business continues to deserve its wide-moat rating, on the strength of its considerable regulatory barriers to entry and strong network effect.
"From a balance sheet perspective, ASX remains bulletproof with no debt, $8.5 billion in participants margin commitments, and $1.1 billion in ASX-owned cash, of which $226 million is free to use.
"Although expenses growth and capital expenditures will increase in fiscal 2019, we are extremely comfortable regarding the sustainability of fully franked dividends.
ASX was trading at $68.18 at the last close, above Morningstar's $49 fair value estimate.
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Glenn Freeman is senior editor, Morningstar Australia.
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