ASX: Interim result 2019

Given the 9% fall in the All Ords in the six months to December, you might have thought it was a bad time to be running a sharemarket, but ASX gave the lie to that last week with a sparkling set of numbers.

In fact the volatility actually helped, prompting a 15% rise in revenue from sharemarket trading and a 6% rise in derivatives revenue, supported by heavy trading of the S&P/ASX 200 futures contract (aka, the 'SPI').

Perhaps more surprising, given the market collapse in the December quarter, was that market capitalisations were higher on average in the period, compared to a year earlier, supporting a 9% rise in listings revenue.

Meanwhile, the Coles demerger helped issuer services revenue rise 6% and technical services revenue rose 8% thanks to increased connections for the Australian Liquidity Centre (ALC).

All up, revenues rose by 7% to $425m.

Overzealous cost-cutting

The weak spot was expenses, which rose 9%, of which about 3% was put down to inflation and 2% to investment in growth initiatives. The remaining 4% was due to the 'stronger foundations' program, which aims to 'enhance risk frameworks' and 'operational resilience'. This was outlined at the full-year result last August and amounts to a correction of overzealous cost-cutting in the past. The additional costs should be in place by June and will repeat in future years but should not contribute to cost growth beyond 2020.

The 2% additional spend on growth initiatives is more encouraging.

ASX's growth strategy, says chief executive Dominic Stevens, is made up of three layers. The first is founded on 'trust, resilience and independence of our core operating platform'. It includes, for example, the efforts to replace CHESS with a new settlement system based on distributed ledger technology.

The second is about growing the 'core value proposition' - 'applying innovation ... to enhance our offering to customers' - such as by reducing settlement times and enabling cross-connections at the ALC.

Growth options

So far, so much management speak. But it's the third layer that's most interesting. ASX wants to use its expertise at operating trusted markets and platforms to break into new areas. Stevens offered three examples.

The first is data analytics, where ASX has been developing a platform for collecting and managing data which companies can use to 'solve complex problems' and develop new revenue streams.

The second is Sympli, a conveyancing settlement system that ASX is developing with ATI, the leader in the property search market and practice management systems for conveyancers.

The third is distributed ledger technology (DLT). In essence, DLT involves a network of computers that verify and share a record, or 'ledger', so that everyone has a copy and there doesn't need to be a central administrator. It can be public (such as with Bitcoin) or private, which is what ASX is planning for its CHESS replacement, with market participants signing up to access it.

Stevens said that developing the CHESS replacement has enabled ASX to understand the broader benefits of DLT generally and the programming tool - 'DAML' - which is being developed by ASX's software partner on the CHESS project, Digital Asset Holdings (of which ASX owns 7%).

The CHESS replacement, Stevens explained, essentially involves three layers: the distributed ledger itself, then a database layer, and then the settlement system that sits on top as a kind of application. ASX thinks it can make use of the first two layers in other ways, by putting different applications on top.

In this way, Stevens believes ASX can develop solutions 'for basically any logistical or organisational problem that would benefit from a permissioned real-time source of truth' across the financial services industry. And since it will be rolling out the CHESS replacement to so many financial institutions, it will have a ready-made source of potential customers. When pressed on specifics, Stevens pointed to debt markets and insurance as potential areas where it might be used.

It's impossible to say whether ASX will be successful with these or other growth initiatives - but good things tend to happen to good businesses and ASX is one of the best.

We've come a long way, though, since we first recommended buying the company in 2012. Back then dark clouds were looming; now we're seeing a lot of blue sky. Back then the stock was priced at 16 times earnings; now it's on 27 times. We're happy to hold on for the ride - and we're nudging up our price guide a little - but we're a long way from buying. HOLD.