ASX: Result 2013

ASX's results for the year to June were about as flat as you can get, with revenue almost identical to last year and underlying net profit 1% ahead of last year and guidance, and in line with the consensus forecast.

But looks can be deceiving and under the bonnet there were some interesting shifts. The most obvious was between the first and second halves, with profits falling 5% in the first and then rising 7% in the second thanks to increased market activity, but there was also a wide spread of performances from ASX’s various operating divisions.

The derivatives segment increased revenues by 5% to $197m, to keep its title as the group’s largest revenue generator, with 32% of the total. The total number of contracts traded on ASX 24 rose 12% to 116m – driven particularly by interest rate futures and options activity in the second half – but higher large volume rebates meant a fall in average fees from $1.56 to $1.46.

A clearing service for 'over-the-counter' (OTC) $A interest rate swaps was launched on 1 July 2013 and the company expects customers to sign up over the next 6-12 months. The idea is that it will enable participants to offset OTC exposures with existing futures positions to reduce the overall level of collateral they have to provide. How this is travelling will be a major focus for the AGM in Sydney on 25 September and for interim results on 13 February.

The next biggest contributor, with 23% of the total, was listing and issuer services, which increased revenue by 5% to $140m, helped by the full-year impact of fee increases. This was more than enough to make up for the very slow capital markets activity, with the lowest number of new listings since 2009 and least amount of money raised ($46bn) since 2005.

Cash market turnaround

Cash market revenues fell 8% to $115m over the year, but this comprised an 18% fall in the first half and a 4% rise in the second. ASX’s market share of on-market traded value was 95%, but this is now down to about 92%.

The total billable value of ASX trades fell for the third year running, by 12% to just over a trillion dollars, but the average fee per dollar traded rose from 1.05 to 1.1 basis points.

Information services revenues fell 8% to $62m reflecting the lower equity market activity. But technical services revenues grew 10% to $50m, with the number of cabinets operated by clients in ASX’s Australian Liquidity Centre increasing from 76 to 117 over the year. Austraclear enjoyed another year of steady growth, with revenues rising 7% to $39m.

Costs rose 4% during the year, mainly due to a 6% rise in staff costs, with headcount rising from 505 to 529 to support new business initiatives, mostly in post-trade services, such as the new OTC clearing operations and Austraclear’s new ASX Collateral service.

Dividend lower

Earnings per share were flat at 196 cents, with no dilution from the rights issue since it took place so late in the year. However, dividends are affected, because they’re now spread over more shares. As a result, the final dividend fell 3% to 82.3 cents (fully franked, ex date 2 Sep), giving a total for the year of 170.2 cents, down 4%.

Consensus expectations are for the company to increase earnings by about 2% to 200 cents in 2014. That looks pretty conservative to us, given the improvement in markets, but it implies a prospective price-earnings ratio of about 18 and a fully franked dividend yield of about 5.1%, based on ASX’s policy of paying out 90% of earnings.

The stock is up 6% since we upgraded in Time to Buy ASX on 14 June 13 (Buy – $33.08), putting it slightly above our Buy trigger. But the valuation still looks attractive and we're happy to wait for a bit of airspace above $35 before downgrading. BUY.

Note: Our Income and Growth portfolios own shares in ASX.