An interesting beast: ASX Ltd

Dominic Stevens is the Managing Director and CEO of the ASX which he’s been running since August, 2016. Unusually, he was, before that, an independent non-executive director of the ASX for three years and he was promoted or demoted, if you like, to CEO in August, 2016. Before he went on the board of ASX he was the CEO of Challenger. 

Now, the ASX is an interesting beast. It’s a utility, obviously the provider of the stock market and futures exchange in Australia, pretty much a monopoly, has a wide moat and long been seen as a pretty solid income stock for Australian investors because it pays fully franked dividends. But the problem is that it’s quite expensive. The yield is 3.5%, fully franked of course, but still just 3.5% so not up there with the banks. It’s PE currently is 25 times, so it’s not a cheap stock. It’s basically being priced not as a utility income stock but as a growth stock. 

The purpose of interviewing Dominic Stevens really is to investigate whether that rating and that status as a growth company is justified. There are two ways in which it can be justified. One, is the potential for the shift to blockchain which they’ve announced and will replace their settlement system, that could be a really interesting and big move, cutting costs and also leading to a whole new field of endeavour for the ASX. And the other thing which I’m quite interested in is the way the ASX is becoming a global listings force for technology companies around the world, including Israel.

The reason I’m interested in that is because I keep bumping into and interviewing CEOs of companies that are listed on the ASX that are based all over the world and it’s very interesting. It seems to me, just talking to Dominic in the interview, it’s kind of landed in the ASX’s lap. I mean, they’re picking it up now and they’re really running with it, but this, it seems to me, is a key element of ASX’s growth story to become more of a global marketplace for technology and venture capital.  

That’s what the focus of the interview with Dominic Stevens was about and I think it’s very interesting. Whether it justifies the PE of 25 and a yield of just 3.5% is another matter and that’s perhaps one for you. I think it’s a stretch to be honest, but it’s well worth keeping an eye on. 

Here’s Dominic Stevens, the CEO and Managing Director of ASX Limited.

Dominic, there’s a couple of things that are going on that are really interesting, let’s focus on those.  The blockchain process, tell us where that’s at and also what the plan is?

Okay, so at the moment we announced to the market in December that we were going ahead and using that.  What we’ve now got to do is take all of the consultation we got from the market, put it together into what the first drop of the software will be.  There’s something like 45 different requests new functionality and so we’ve got to work out exactly what we’re going to build and order those, and then work out how long that’s going to take.

So, it’s not just simply a matter of replacing CHESS with a blockchain, you’re going to actually rebuild the whole thing and add a whole lot of functionality.

Yeah, and add functionality, and then we’ve got to work out how we do it and that’s an interesting thing.  As you can imagine this is actually a system that’s embedded in so many things, so what sort of process do we go through.  Last year we went through the process of rolling out a whole new futures technology and that was very successful but it’s certainly something that it’s going to take some time in some form of parallel running to actually make sure everything is ready to go on the day that we cross over to the new system.

Because I had an idea that it was largely about cost reduction but it sounds like it’s not just about that.

Well I think any more modern system is going to have a whole range of things, it’s going to be cost reduction, it’s going to be risk reduction, it’s going to be better resilience for the system and it’s going to be improved functionality.  I think the key thing is that when users of the system can have real time information that they can rely on as source of truth and prove to themselves that they don’t have to reconcile this, they know exactly what’s gone on because they’re a part of the database, that actually means that a lot of the processes that go on in the back office that causes cost are actually just daily reconciliation between all the different players.

I mean a side effect of this is to, in a sense, legitimise blockchain or at least to give the notion.  Because a lot of people kind of equate blockchain with cryptocurrency and are seeing the whole thing as a bit of a scam or there are lots of different opinions about it.  But, if you do it that changes everything in a way.

I think you’re right, Alan.  I think that’s important.  If you look at any disclosures we’ve done we’ve been very careful very much from the start to say we’re in the permissioned blockchain world that is not anonymous, because you can’t have a market that’s anonymous.  It’s not a market where there’s a consensus mechanism, where there’s server farms in other countries that actually confirm trades and that they use the power consumption of the whole of Ireland which is what they talk about that Bitcoin uses.  So, very much this system will be sitting behind the firewalls, or improved firewalls in fact, that we already had in place.  It will be permissioned people who are permissioned into the system.  So, in my mind there’s two things going on here.  There is that world, which I think most people if you speak to heads of banks around the world they say there’s a massive benefit in that, everyone can see that, everyone’s over the line there.  There’s this other world of ICOs, cryptocurrencies, consensus mechanisms and all of that where I think the jury is out as to exactly where that is going and where there’s value, and are there problems with some of the things.

I think definitely certainly a lot of the regulators around the world are starting to question ICOs, cryptocurrencies, what really…

I take it you’re not going to do an ICO?

No, I think we’ll stay in the listed world and we’ll stay focussed on a permissions blockchain.

The other thing that’s going on, which I find quite interesting, is the number of foreign listings you’re getting on the ASX because a lot of the companies I’m interviewing 30% to 40% of them are foreign.  Half of the time I’m speaking to Tel Aviv or America.  So, this is a deliberate strategy, right?

It is, it’s really interesting because actually where it began was if you look at New Zealand there was a number of really valid reasons bigger investment pool, more mandates, more global money in Australia for those companies to become dual listed.  That has moved something north of $80 billion of listed company market capitalisation onto the ASX.  Then when you get through that process you start saying well what’s next, and you start thinking well what are similar things like New Zealand where it’s perhaps a smaller market that doesn’t get the international coverage.  The Tel Aviv market, it was one of the ones that we saw that it was actually one that had a similar thing.  Everyone wanted to go to NASDAQ but unless you’re like a $5 billion company it’s hard to go to NASDAQ and so in talking to companies and succeeding in Israel the really interesting thing was when talking to CEOs a lot of them said look, I’ve been around the world and the US exchanges – if I’m a 500 million or 300 million company the US exchanges are too big.  I could go to London or Canada but it’s a second board, I don’t like a second board.  Some of the other things I could do, they’re quire difficult, and actually ASX is a bit of a sweet spot.  You’ve got a very sophisticated market, you’ve got huge investor demand and funnily enough investor demand for technology because actually technology is an under-represented sector on the Australian market.

I was going to say, the word has gone out in Silicon Valley, it’s not just in Israel.  I mean a lot of them – and I always ask these people why do you choose to list on the ASX and invariably the answer is well they knew somebody that did already and it’s been positive. 

It’s been a positive process.

It’s beginning to be seen, the ASX is beginning to be seen, as a global venture capital source.

Yes, I think that’s right.

Is that something you thought would happen or has that sort of just happened and it’s a surprise?

Well I think it’s a bit of both.  I think we can only do so much.  Effectively it’s not as if we’ve changed the listing rules just for these companies or whatever, they’ve come here.  I think what there has been, what we’ve enabled, is a realisation I think that the ASX is a market for this.  What you do with markets is if you can create a critical mass, in other words we’ve gone from sort of about 50 to 100 technology companies to well north of 200 and in the foreign space I think we’re heading up towards 300 companies and you start getting comparable and you start getting investor interest.  I think Xero moving from New Zealand to a full ASX listing, another company a US fin tech from the west coast, Credible, moving onto the ASX, it’s sort of saying this is actually a valid market for technology to list.

Yes.  Do you think you’re at the critical mass now?

I think that’s a really good question and I think our strategy, Alan, is actually trying to work out – as I said, it started in New Zealand, went to sort of other smaller states but maybe are we just a good place for that midcap sort of half a billion dollars and upcoming companies to invest here.

Well some of the ones I’m talking to are $50 million companies, there’s a little with $20 million.

Yeah there could be, and I think it gets harder as it goes sort of much below 50 but certainly I think for us particularly offshore to come all the way down to Australia I think it’s got to be sort of more at the higher end than the lower end.  I think it’s an exciting strategy and they come here and they have to pass the listing rules and they have to deal with the continuous disclosure methodology here which is probably tighter than anywhere else in the world or pretty much most places of the world.  So, it’s a bar for them to climb but it appears to us that the fact that maybe a three quarters of a billion dollar company can get into the ASX 300, there’s mandates here.  We’re a market that even though we’re not the largest market in the world most investors globally will have a presence in some sense on the ASX.  So, we’ve sort of got all those positives.

Because I think most investors, smaller investors and my subscribers, would see the ASX traditionally as sort of a monopoly utility, income stock, pays a decent yield fully franked, reasonably safe because you’re a protected good solid mote, as Warren Buffet would say, around the business.  The reason I’m asking about these issues is the extent to which the ASX now should be seen as a growth company as well as an income stock.

Well, I think there’s two things to that.  One is you talk about competition and the funny thing is if you think about our futures business it’s really competing globally, our listing business more and more is actually competing globally for companies.  There is a bit of competition there but to your second point that listings is actually expanding.  If you look at the futures business it’s expanding because actually we’re bringing investors from offshore and actually connecting them into Australia.  To give you a fact go back 10 or 15 years probably 10% or 15% of the market was overnight, now 30% of the market is overnight, so we’ve become this 24 hour market.  Again, that’s bringing things in from overseas.  Then thirdly I think there’s a really interesting thing going on at ASX around the fact that actually everyone in the world is talking technology disruption, the power of information real time and all that, and if you think about what we’re doing in the fact that we brought everyone together into the ALC up in Artarmon where effectively all the – our cash liquidity centre.  Which is effectively where the market sits and all the players come in with their technology so they’re all in one spot, and that then allows them to access the data. 

What we’re trying to do is actually make more data available and more information available, and give the ability to people to do more in analytics.  I think that plays into the trend that the world is very much looking for real time information, source of truth information that can be delivered to them in a usable form.  So, you look at distributed ledger, or blockchain if you will, you look at some of the things we’re trying to do around bringing more data out of other systems to be able to make them available to customers, it plays very much into that.  So, back to your first point, growth strategy – yes there is a growth strategy that actually comes around that.

Great to talk to you, Dominic, thank you.

Of course, thanks Alan.

That was Dominic Stevens, the CEO and Managing Director of ASX.