Solid FY15 Masks Limited Outlook For ASX

This story features ASX LIMITED. For more info SHARE ANALYSIS: ASX

-Valuation underpinned by cash, yield
-Yet rebates reduce revenue upside
-Commitment to infrastructure upgrade
 

By Eva Brocklehurst

Momentum in cash equities continues to build for ASX Ltd ((ASX)) but leverage to the upside is limited in the view of some brokers. June trading finished off a solid second half, with the highest rolling six month growth rates since August 2010.

SFE volumes were also robust, up 17% in June and 12% for the second half, while rolling three-month volumes were just shy of the record high in June 2013. The merger of Novion and Federation Centres ((FDC)) boosted capital raisings for the exchange. Derivatives activity fell 9.0% in the second half, which Credit Suisse attributes to the exit of key market maker, Optiver.

Credit Suisse expects the company will face structural headwinds over the next few years although valuation should be supported in the near term because of the good cash generation and relatively low dividend and earnings risk. Despite the stronger activity levels, Deutsche Bank only raises FY15 estimates by 1.1% because of the rebate structure, which returns 50% of positive revenue growth to participants, as well as the SFE tiered fee structures.

The earnings growth outlook does appear more subdued for FY16. Citi upgrades FY15 estimates by 2.0% and makes no changes to future years. Stripping out sizeable deals suggests underlying growth is much softer and FY16 is likely to be challenging unless activity picks up substantially. The broker is attracted to the debt-free balance sheet and yield yet also considers the prospect for a near-term step up in earnings is limited. Heightened volatility should continue to support near-term cash trading, while the broker envisages few risks to cost and capex guidance.

The company has offered to reduce clearing fees, including a 14% initial reduction, if the government extends its clearing moratorium and code of practice for a further five years. Citi installs this as its base case but accepts such an outcome is not completely certain. A decision by the regulator is imminent. Citi believes other diversified financial stocks are more attractive, given ASX’s relatively high trading multiple and lacklustre growth profile.

UBS expects revenue to be lower in FY15 versus FY14 because of fee reductions for electricity and interest rate futures products. Similarly, solid growth in cash market activity will deliver around $5m in rebates in the second half, reducing the revenue upside. The broker adjusts forecasts up by 1.5% for FY15 for stronger listings activity but reduces the outer years by 1-2% because of a slightly larger impact from ASX24 fee reductions.

The broker notes the company has committed to a significant investment program in trading and post-trade infrastructure over the next 3-4 years. Regulatory reviews of cash market clearing remain outstanding. UBS expects a positive response to the ASX submission should deliver a revenue impact of $7m per annum from the new fee structure and also provide the opportunity to upgrade CHESS settlement systems.

On FNArena’s database there are five Hold and three Sell ratings for ASX. Consensus target is $41.04, signalling 0.4% downside to the last share price. The dividend yield on FY15 and FY16 estimates is 4.6% and 4.7% respectively.
 

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