The Distillery: Clearing the decks

The market operator's latest results answered the question of whether its clearing and settlement monopoly was a senseless cash gift, but left the door open on whether the recent rally carried it into the black.

Also in this morning’s edition of The Distillery, Fairfax Media and Seven West Media give us another glimpse into the rapidly deteriorating world of traditional media revenue streams.

But first, The Australian Financial Review’s Chanticleer columnist Tony Boyd notes that these are the first set of ASX financial results that give us a glimpse at the clearing and settlement numbers, which some believe would be enormous thanks to the market operator’s recently reinforced monopoly.

“Cash market clearing delivered a net profit of $25.9 million on revenue of $42.65 million. Return on the total capital of $221 million was 11.7 per cent. Cash market settlement had a net profit of $23.3 million on revenue of $42.8 million. Its return on total capital of $130.4 million was 17.8 per cent. The suggestions in the market that return on equity in clearing and settlement was in the range of 25 to 30 per cent proved incorrect. The returns on this capital-intensive business are reasonable.”

Fairfax’s Malcolm Maiden argues the crucial question for the ASX is whether the trading activity rally has pushed them into positive territory.

“…The latest trading figures don’t provide an answer. Operating revenue fell by 3.3 per cent in the first half compared with a year earlier and then rose by 5.8 per cent in the second half. Cash equities market revenue fell by 18 per cent in the first half and rose by 3.8 per cent in the second half, and derivatives market revenue fell by 2.3 per cent in the first half and rose by a solid 11.7 per cent in the second half. Information services revenue staged a similar second-half rally.”

Meanwhile, Fairfax Media released its results yesterday and Business Spectator’s Stephen Bartholomeusz wonders what it would have been like if company boss Greg Hywood hadn’t embarked on and delivered his huge cost cuts.

“Without that ‘Fairfax of the Future’ program the traditional core of Fairfax, its metropolitan mastheads, would almost certainly no longer exist. The problem that has confronted Hywood, and indeed some of his predecessors, is that Fairfax’s revenues are declining faster than he can cut costs and that to the extent that he can replace diminishing print media revenue with digital revenues he is faced with the digital media reality of low margin revenues. Hywood isn’t, of course, alone. The same issues are being grappled with around the world and, of course, by Fairfax’s major competitor, News Corporation Australia.”

Fairfax’s very own Elizabeth Knight broadens the discussion to include Seven Network, which is dealing with the challenges that the net poses to traditional media operators.

“Seven and Fairfax, as listed companies, had to spend much of their air time on Thursday explaining their productivity initiatives and defensive inroads into the cost of doing business. Nine, which has been on a programming and station (Perth and Adelaide) shopping spree, occupies the luxurious space outside the glare of the market, for now. But its former Nine lenders (come shareholders) are not the natural owners. This is now being tackled with an expedited float that gives them an opportunity to cash out. The bottom line is that a new level of existential competition has emerged in media when their future is more exposed than ever.”

The Australian’s Darren Davidson reports that Seven West Media boss Tim Worner was trained under company legend David Leckie, but the company he now overseas is entirely different.

“At first glance, the top line figures presented to investors by the newly installed Seven West Media chief executive barely two months into the job were nothing to crow about, but they don’t tell the full story. Kerry Stokes’s Seven West Media dropped into the red following a $221 million writedown on its magazine business but the company hit its underlying profit target. Writedowns have become par for the course in the media sector and a cleaner balance sheet is just where Worner wants it to ensure the big red train is in the best possible shape as he focuses on big challenges ahead.”

Elsewhere, The Australian Financial Review’s Matthew Stevens has a terrific piece on Fortescue Metals Group where he makes the astute point that Andrew Forrest’s company has suddenly become a company that under-promises and over-delivers. This is something Fortescue and Forrest would not have been accused of 18 months ago.

And finally, The Australian’s economics editor David Uren acknowledges the point that the Coalition’s parental leave package is supposed to be fully funded, but adds that the company tax cut to placate businesses put out by the levy still has to come from somewhere.

Without releasing the costings, Uren points out the speculation is allowed to run rampant.