ASX Earnings: Profit Slides on Accelerated Spending To Protect Economic Moat

We lower our fair value estimate for wide-moat-rated ASX ASX by 3% to AUD 72.50 following its full-year results. ASX reported underlying earnings of 254 cents per share, a 3% decrease from the prior year and 6% below our forecast on higher-than-expected costs. At current prices, ASX shares trade materially below our fair value estimate. We believe the market is overly focused on near-term growth in expenses and capital expenditures, while we view these as vital investments to secure ASX’s long-term economic moat.

We believe ASX has been making the right decisions to protect its economic moat. ASX currently holds various exclusive licenses to operate certain types of trading and clearing businesses in Australia, which supports its economic moat. But these advantages weakened substantially when the ambitious blockchain-based replacement project for its aging Clearing House Electronic Subregister System, or Chess, was repeatedly delayed and eventually shelved. An outage in November 2020 further damaged ASX’s social license and in turn weakened its moat based on regulatory exclusivity.

To address increased regulatory scrutiny, ASX has focused on retaining and regaining its social license. This starts with taking responsibility. As we said in our Jan. 19, 2023, note “ASX Clears the Deck for a Fresh Start,” new CEO Helen Lofthouse has set off a leadership overhaul, which we believe will benefit ASX, its shareholders, and the broader Australian financial ecosystem through fresh perspectives. ASX also appointed Alan Cameron, the former chair of the Australian Securities and Investments Commission, to lead a new ASX advisory group for the replacement of Chess.