ASX: Result 2014

In ASX: Competition cuts in – Part 3 on 28 Nov 12 (Long Term Buy – $29.32), we pencilled in an annual revenue decline of 8% a year for its traditional sharemarket business (aka the ‘cash market’) in our central scenario. After all, it had fallen at an average of 10% a year since its last rise in 2008 and was facing the insidious creep of competition. It was intended to be reasonably conservative and we were expecting it to bounce around a bit, but we certainly weren’t expecting too many rises – yet that’s what we got in 2014.

OK so it was only 2%, but you take what you can get. Back in 2008, the cash market was ASX’s biggest business, contributing $189m of revenue, or 30% of the total. Now it’s down to $117m and just 15% of the total, but clearly there’s life in the old dog yet.

It wasn’t just the bull market that got things going. Although the total value of shares traded on-market rose by 4.5%, a fall in ASX’s market share from 95% to 91% kept its own traded value flat at $1 trillion. Instead, ASX was able to get its margin up from 1.10 to 1.16 basis points (0.33 for trading, 0.43 for clearing and 0.41 for settlement), helped by innovations like ASX Centre Point, the exchange’s very own dark pool. Centre Point almost doubled its traded value in the year to 6% of the total, but delivered 17% of trading revenue, due to a trading margin more than three times that of the main market.

Innovations like this, as well as over-the-counter (OTC) clearing and ASX Collateral, show that the company is not resting on its laurels, but the biggest reason for ASX’s slightly better than expected 2014 result was the plain old booming float market. There were 107 floats in all over the year, up from 82 in 2013, and they were big ones  – delivering a 179% increase in capital raised to $28bn. Already listed companies also chipped in a 5% increase in capital raised to $38bn. In all, Listing and Issuer Services contributed 24% of total revenue, but it provided 37% of the overall increase in revenue.

ASX’s biggest division is Derivatives, which increased revenue by 5% to $208m thanks to a 10% rise in futures and other derivatives traded on ASX 24, which overcame a 22% fall in equity and equity-index options. The company said its new OTC clearing business had already cleared $124 billion in notional value, although its contribution to revenue will be (very) small at this stage.

Information Services had a good year, increasing revenue by 11% following a price rise, as did Technical Services, which increased revenue by 6% thanks in part to a 50% rise in connections to ASX’s Australian Liquidity Centre.

Operating expenses growth was limited to 5%, giving a net profit increase of 10%, but this was pegged back to an earnings per share rise of 2% due to the increased number of shares on issue following the rights issue in June 2013.

The stock is barely changed since ASX: Interim result 2014 on 14 Feb 14 (Buy – $36.80), giving it a forward price-earnings multiple of 18 based on consensus forecasts for 3% growth in 2015. Given its high cash generation, however, the company can sustain a 90% payout ratio, delivering a fully franked dividend yield of 5%. That still looks attractive for a company that we’d expect to grow at least in line with the economy over the long term. BUY.

Note: Our model Growth and Income portfolios hold shares in ASX.