It made sense for former chief executive Elmer Funke Kupper to talk up ASX’s investment in distributed ledger (aka Blockchain) technology at the interim results back in February, ahead of the Council of Financial Regulators’ decision on clearing competition. With that decision having been made, it also makes sense for new chief executive Dominic Stevens to be watering down the wilder expectations of what it might mean.
Strong performances across the business
Language around blockchain watered down
Growth to slow in 2017 due to lower interest income
Today’s full-year results presentation explained that a ‘public blockchain’ was ‘not applicable to highly regulated markets’ and that ASX’s planned ‘Private Permissioned Ledger’ would be ‘similar to today’, but with an ‘enhanced database architecture’.
‘We do not seek to change the existing regulatory framework,’ explained deputy chief executive Peter Hiom on the conference call. ‘What we change is the way that data is authenticated, authorized, accessed and stored. It is this that creates the single source of truth that could remove complexity and deliver significant benefits to the industry.’
We don’t doubt it – but it’s a long way from the ‘disruption’ that some have been talking about. It’ll also help discourage any would-be competitors who might be licking their lips after seeing the 11% rise in ASX’s equity clearing revenues and the 8% rise in settlement revenues.
|Year to June ($m)||2016||2015|| /(–)
|Dep. & amort.||(43)||(39)||11|
|Interest and divs||73||72||2|
|* Final dividend of 99 cents (up 4%),
fully franked, ex date 8 Sep
The good result might raise concerns about competition in this area, but we’d guess any potential competitors will be put off by the relatively small market size (total clearing and settlement revenues of $102m) and ASX’s willingness to innovate and defend it. On top of its investment in ‘Private Permissioned Ledger’ technology, ASX introduced ‘T 2’ settlement in March and reduced clearing fees by 10% in July.
Awake at the wheel
It’s one thing to go in and attack an incumbent when they’re asleep at the wheel, but ASX appears to be anything but.
The 13% increase in cash market trading revenue – the business that’s already facing competition from Chi-X – is testament to that. ASX kept its market share at about 89% of traded value, which gave it an average of about $4.2bn of trade value per day. Just over a quarter of that value was in ASX Auctions and ASX Centre Point, the ASX’s answer to ‘dark pools’, but they contributed almost half the trading revenue due to their higher margins.
Listings and issuer services managed a 5% revenue increase, with a 39% fall in capital raised in IPOs (to $23.6bn) offset by a 10% increase in secondary capital to $55bn ($20bn of it from the big four banks).
Revenue from derivatives and OTC markets also rose 5%. The main driver here was an 8% increase in futures contracts traded (helped by fourth-quarter surge), but more remarkable was the performance from the OTC (over-the-counter) derivatives clearing. This business, which was set up in 2014, cleared $1.3 trillion of notional value in the June quarter, up from $360 billion in the same quarter of 2015. For the full year, $2.7 trillion was cleared, up from $806m in 2015.
With all the investment going on – a large part of which passes through the profit and loss account – we’re not concerned by the 7% rise in operating expenses. Guidance for 2016 is for a 6% cost increase.
There was also a 13% rise in capital expenditure to $50m, with more than half going on the ‘technology transformation program’ directed at a new futures trading platform to be launched in February 2017, risk management and market monitoring, as well as the investment in distributed ledger technology. Guidance is for something similar in 2017.
All up, underlying net profit rose by 5.7% to $426m, of which $392m came through in the form of free cash flow. Earnings per share (EPS) were up 7% to $2.204, and full-year dividends came to $1.98, a payout ratio of 90%, as per the dividend policy.
That puts the stock on a forward price-earnings ratio of 23, a free cash flow yield of around 4% and a fully franked dividend yield of about the same. That looks like reasonable value for such a high-quality, cash-generative business with reasonable prospects for gentle – we'd estimate low to mid-single digit – earnings growth. We’re raising our Buy price to $50 (from $45) and our Sell price to $70 (from $65), which brings the stock back into Buy territory – just. BUY.
Disclosure: The author owns shares in ASX.