ASX: Interim result 2017

Increased trading activity in both shares and derivatives made up for lower listings in the first half for ASX, allowing revenues to creep up nearly 3% overall to $387m.

The total value of share trading on the ASX in the half rose almost 2% to $539bn. However, a greater proportion came from the higher margin Centre Point exchange, where the value increased 51% to reach 10% of the total, so cash market trading revenue rose 15% to $23m.

Technical Services revenue rose 8%, with increased connections and the number of customer cabinets hosted in the Australian Liquidity Centre (ALC) increasing from 219 to 270. Information Services revenue, however, fell 1.8% due to fee changes. Overall Trading Services revenue rose 5% to $96m.

Within Derivatives and OTC Markets, the nascent OTC operations continued to expand rapidly, with the value cleared rising to $2,160bn, from $817bn in the prior corresponding period. Futures contracts traded rose 9%, giving a 5% rise in overall revenues for the division, to $133m.

Although the number of IPOs rose 12% from the prior corresponding period, to 86, there was a lack of really big floats and initial capital raised fell 18% to $11.1bn. Big offerings from those already listed were also notably absent, with total capital raised in the secondary market falling 37% to $25.8bn.

Demonstrating the resilience of this business, though, listing revenue marched up 7% due to fee changes and increases in market capitalisation (bigger companies pay higher fees). Overall, revenue in the Listing and Issuer Services segment fell just 2% to $103m.

Equity Post-Trade Services increased revenue by 4% to $53m, but the composition of that figure reveals where the threat of greater competition hangs. Clearing revenues fell 1% due to a 10% price reduction that took effect on 1 July, while settlement revenues rose 10% due to a 10% increase in dominant settlement messages.

Operating expenses rose 6%, as foreshadowed, due to a 6% increase in average headcount and a corresponding 9% rise in staff costs. A similar increase is expected for the full year.

The net effect of all this was a 3% rise in net profit to $219m and a similar increase in earnings per share to $1.13. That puts the company well on the way to making the consensus forecast of $2.28 for the full year (which would be an increase of about 4% on 2016).

Capital expenditure in the half came to $20.3m, down from $31.5m in the preceding half, but up from $18.7m in the prior corresponding period. ASX tends to spend more in the second half of the financial year and that pattern is expected to be repeated with (unchanged) guidance for full-year capex of about $50m.

The interim dividend was raised by 3% to $1.02 (fully franked, ex date 9 March), maintaining the company's target 90% payout ratio.

Management didn't offer much on the proposed replacement for CHESS, save to say that it has been consulting widely and is continuing to do so, including through its 'acceler8' dedicated demonstration suite that looks like something out of the Starship Enterprise. The company continues to develop its base level equity post-trade system based on distributed ledger technology to help inform a decision expected in late 2017 on the exact technology to use.

ASX is traveling well and the market seems to be coming round to that view, with the stock rising 26% since our review of last year's interim result. That gives it a capital return of 73% since we initially upgraded it in 2012. On top of that there's been a fully franked yield that amounted to almost 6% when we initially upgraded, but which has now dipped below 4%.

That move has taken the stock above our $50 Buy price and we're therefore downgrading to HOLD.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in ASX. You can find out about investing directly in Intelligent Investor portfolios by clicking here.

Disclosure: The author owns shares in ASX.