ASX set to take centre stage

ASX has been 'ever the bridesmaid' in recent years, as low interest rates have had investors rushing for any juicy yield that's going. Over the past two years, CBA has risen 36%, Telstra has gained 40% and Sydney Airport has soared 60%. ASX, meanwhile, has ticked up a paltry 11%.

So why have investors been brushing it off? Well growth has been slow, if steady, and there have been concerns over competition in equities trading, in the form of Chi-X, and potentially in clearing. But its interim result showed growth in all of ASX's revenue categories and there was precious little sign of any genuine risk to its business.

In fact, the big news was of a major investment the company will make over the next few years to enhance its market position, through an overhaul of its major trading and post-trade platforms. Amongst other things the upgrade will bring ASX into line with global standards, thereby reducing ongoing development and maintenance costs. It will also add multi-currency capabilities, enabling dual-listed ASX and New Zealand Stock Exchange stocks to trade in both Australian and New Zealand dollars.

Although it will initially exclude equities clearing and settlement – its monopoly over which is currently before the Council of Financial Regulators with a decision due by mid-year – the investment program should help ASX demonstrate its commitment to keeping its systems up to date.

If you can't beat 'em, join 'em

In the result itself, ASX reported growth in all major revenue categories. Even the beseiged cash equities business increased revenue by 5%, with market share only slipping from 91% to 90% from a year earlier – not bad for a business thought by some to be in a competitive death spiral.

It was particularly good to see the company's 'if you can't beat 'em, join 'em' philosophy working nicely, with its own dark pool, ASX Centre Point accounting for 8.1% of on-market value (up from 6.7% a year earlier). Thanks to its higher margins, Centre Point delivered a whopping 18% of cash market trading revenue.

Listings and issuer services revenue rose 8% to $87.9m, helped by 71 new listings (compared to 69 in the prior period) and a 6% increase in initial capital raised to $19bn. Secondary capital raised rose 4% to $20bn. The company said it was seeing healthy growth in exchange traded funds (ETFs) and also has a focus on technology and New Zealand listings. The new managed fund service, mFund, has also had a good start following its launch in May 2014, with 22 fund managers offering 75 funds through the service.

Bright spot

Information Services and Technical Services revenues grew by 8% and 10% respectively, while Austraclear chipped in with 9%. Another bright spot was the dividend from IRESS, which rose 47% from the prior period, to $4.9m. This financial software company has risen by 27% over the past couple of years and ASX's 19.3% stake is now worth $334m, more than 4% of its own market value.

The laggard was Derivatives, which only managed growth of 3.3% year-on-year, to $103m, and actually contracted 4% compared to the second half of the 2014 year, due largely to higher rebates and fee cuts. These knocked revenues by about $5m in the half but are expected to have an ongoing impact of $17m a year.

Operating expenses rose in line with revenues, the company doing its bit to stave off deflation with staff costs increasing 6% despite a 1.1% fall in average headcount. This left earnings before interest and tax of $249m, up 5% and a net profit of $199m, also up 5%.

Healthy cash flow

Free cash flow came to a healthy $241m, so the company was able to buy a 49% shareholding in Yieldbroker for $65m, pay 2014's final dividend of $174m and still end the period with the same $1,030m it started with.

The company said its investment program will cost $40–50m a year for the next few years, but that's not so far out of line with the average of $41m a year since 2011. At the time that was seen as unusual, although it's beginning to look like a new normal. At 10-12% of net profit, though, it's easily manageable and shouldn't affect the company's 90% payout ratio. As already mentioned, it may also help protect the company's competitive position.

All in all, ASX's growth has been slow over the past few years and that doesn't look like changing. It keeps ticking along, though, and in the current environment you don't need much growth to justify a 4% fully franked dividend yield. ASX remains a high-quality company available at a cheap price and we recommend you BUY.

Disclosure: The author owns shares in ASX.