ASX, you were meant to be relatively defensive with some mild earnings leverage to higher interest rates.

Today, at the investor day, ASX management guided to higher opex (12%, instead of 10-12%, and a higher number for FY24) and higher capex (slightly lower, for this year, but elevated over the next few years).

The market, safe to say, did not like this.

Partly, this is additional cost from the CHESS furphy:

  • there is the ongoing work/planning for the replacement of the old settlement system
  • the sunk cost of the now canned replacement technology, and
  • regulatory + participant costs/additional-oversight from having made numerous errors/own-goals/delays

And partly just inflation. Project costs are going up everywhere.

Also not an especially great time to be hunting for software engineers, as people get excited about tech and AI in general.

The below shows what we like about the ASX. The cash-flows are great. Not shown, but the balance sheet is solid. After all, it is a clearinghouse. The balance sheet isn’t allowed to be anything other than strong.

The investor day made great comment about the “privileged position” the ASX holds. That is true, it does have monopoly like characteristics. That is (and hopefully, something that isn’t about to be lost) a very attractive feature, in an otherwise uncertain economic backdrop.

The ASX is also meant to have some modest rate sensitivity, normally high quality tech is considered long duration, but the ASX does make money of participant balances, to a degree, and having rates that can move freely (unlike during the period of pinned tenors) means a greater contribution from rates derivatives.

We had thought we were relatively safe buying the ASX after it fell from near $90 down to low $60’s, thinking that the blockchain silliness, having been abandoned, and prior management falling on their sword, with new management having settled in, meant we wouldn’t get hit with a “clearing of the decks” type moment.

Rephrasing that, we thought the decks were cleared. Instead, I would say today is that day. New (ish) management (the CEO was installed back in June last year) have done the 5 year rebasing, posting what looks like a pretty low return on equity hurdle (13.5-15%), really only a touch above what they have been doing, and throwing an aggressive enough cost estimate at the various projects on the go to satisfy the market that they are sufficient and serious.

In addition, as if that wasn’t all enough, there is a cyclical slow down in key ASX categories. The monthly reports on ASX activities highlight the IPO drought, shrinking listing volumes, weaker dealmaking, and are not helping. Those are temporary, but still.

So, we’ve gone too soon. But (of course there’s a but) in the longer run, I think the ASX will do well from such expenditure. Rebuilding the market (and other participant faith) will take time.

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