ASX

ASX Limited has announced a $553m 2-for-19 renounceable entitlements offer (aka a ‘rights issue’) to fund increases to the regulatory capital of its clearing businesses, in line with emerging new international capital standards.

The price for the new shares will be $30, but the rights to subscribe for them can be sold on the market (by shareholders or by the company on their behalf), so shareholders won’t lose out if they don’t take up the offer. The stock has entered a trading halt while the institutional portion of the offer is conducted, and they’ll start trading again on Friday 14 June. For a detailed explanation of the mechanics of rights issues, take a look at our Investor’s College article on the subject: Your guide to retail share offers.

As we explained last year in our three part series ending with ASX: Competition cuts in – Pt 3 (Long Term Buy – $29.33), clearing, particularly in derivatives, is an important growth area for ASX, so we’re pleased to see it taking steps to strengthen this side of its business. Specifically, it will repay ASX Clearing Corporation’s existing $250m non-recourse debt and add $200m in additional equity to ASX Clear (Futures), its futures clearing operation. The remaining $89 will be used for ‘general corporate purposes’, which translates as ‘we’re raising money anyway, so we may as well get a bit extra’. But ASX is highly cash generative and shouldn’t need any extra.

Balanced against all this was a very mild profit warning alongside the announcement. The company said it had made a net profit of $318.7m in the 11 months to May 31, 2013, and expects net profit of about $346m for the year to 30 June (pre the rights issue), compared to consensus estimates of about $350m.

All in all, we view the offer as a positive step and we plan to take up the rights attached to the holding in our Income Portfolio. We’re maintaining our target buy price at $33, which amounts to a very small increase after dilution from the offer. The stock is down 5% since 1 May 13 (Hold – $37.76). HOLD.

Note: Our model Income Portfolio owns shares in ASX Ltd.