ASX’s game of two halves

ASX’s results for the year to June were about as flat as you can get, with underlying net profit just 1 per cent ahead of last year and guidance, and in line with the consensus forecast.

But looks can be deceiving and under the bonnet there were some interesting shifts. The most obvious was between the first and second halves, with profits falling 5 per cent in the first and then rising 7 per cent in the second thanks to increased market activity, but there was also a wide spread of performances from ASX’s various operating divisions.

The derivatives segment increased revenues by 5 per cent to $197 million, to keep its title as the group’s largest revenue generator, with 32 per cent of the total. The total number of contracts traded on ASX 24 rose 12 per cent to $116 million – driven particularly by interest rate futures and options activity in the second half – but higher large volume rebates meant a fall in average fees from $1.56 to $1.46.

A clearing service for “over-the-counter” (OTC) $A interest rate swaps was launched on July 1, 2013, and the company expects customers to sign up over the next six to 12 months. The idea is that it will enable participants to offset OTC exposures with existing futures positions to reduce the overall level of collateral they have to provide. How this is travelling will be a major focus for the AGM in Sydney on September 25 and for interim results on February 13.

The next biggest contributor, with 23 per cent of the total, was listing and issuer services, which increased revenue by 5 per cent to $140 million, helped by the full-year impact of fee increases. This was more than enough to make up for the very slow capital markets activity, with the lowest number of new listings since 2009 and least amount of money raised ($46 billion) since 2005.

Cash market turnaround

Cash market revenues fell 8 per cent to $115 million over the year, but this comprised an 18 per cent fall in the first half and a 4 per cent rise in the second. ASX’s market share of on-market traded value was 95 per cent, but this is now down to about 92 per cent, with Chi-X picking up the remainder.

The total billable value of ASX trades fell for the third year running, by 12 per cent to just over a trillion dollars, but the average fee per dollar traded rose from 1.05 to 1.1 basis points.

Information services revenues fell 8 per cent to $62 million, reflecting the lower equity market activity. But technical services revenues grew 10 per cent to $50 million, with the number of cabinets operated by clients in ASX’s Australian Liquidity Centre increasing from 76 to 117 over the year. Austraclear enjoyed another year of steady growth, with revenues rising 7 per cent to $39 million.

Costs rose 4 per cent during the year, mainly due to a 6 per cent rise in staff costs, with headcount rising from 505 to 529 to support new business initiatives, mostly in post-trade services, such as the new OTC clearing operations and Austraclear’s new ASX Collateral service.

Dividend lower

Earnings per share were flat at 196 cents, with no dilution from the rights issue since it took place so late in the year. However, dividends are affected, because they’re now spread over more shares. As a result, the final dividend fell 3 per cent to 82.3 cents (fully franked, ex date September 2), giving a total for the year of 170.2 cents, down 4 per cent.

While ASX faces a further erosion of its cash market revenues, it has long-term opportunities elsewhere, most particularly in OTC derivatives, and the market pick-up should eventually give a boost to fees from capital raisings in particular.

Consensus expectations are for the company to make earnings per share of about 200 cents in the current year, putting the stock on a relatively high price-earnings ratio of about 18. But the company makes most of its earnings as cash, enabling a payout ratio of 90 per cent and a fully franked dividend yield of 5.1 per cent. That looks like good value for such a quality company.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is the research director at Intelligent Investor Share Advisor. You can get access to a free trial to Share Adviser here, which includes instant access to four special reports full of local and overseas stock picks from some of Australia’s best fund managers, including Kerr Neilson, Erik Metanomski, Geoff Wilson and Chris Prunty. You can also follow Share Advisor on Twitter at @value-investing or on its Doddsville blog.

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