CHESS Modernization And Energy Market Expansion Will Boost Future Operations

Key Takeaways

• ASX's technology modernization projects and transitional energy expansion could enhance operational efficiency and tap into growing markets for long-term revenue growth.
  
• Investments in Horizon 2 initiatives and new data services aim to diversify revenue streams, supporting sustainable earnings growth and meeting customer demands.
  
• Regulatory changes and tech investments may restrict revenue and net margins, while risks from investigations and joint venture uncertainties could affect overall earnings.

Catalysts

Operates as a multi-asset class and integrated exchange company in Australia and internationally.

• ASX's technology modernization program, including major projects in trading, derivatives clearing, and CHESS, is expected to deliver significant operational improvements, potentially enhancing future revenue streams and efficiency.
  
• The increase in trading volumes for futures and options, driven by interest rate volatility, suggests potential for revenue growth in the Markets business, although pricing mix impacts need consideration.
  
• ASX's expansion into transitional energy and environmental futures products could tap into new and growing markets, particularly as net-zero transitions become more prevalent, impacting long-term revenue growth positively.
  
• The development of new data and information services, such as the planned debt market activity services, could open additional revenue channels and serve growing customer demands in Technology and Data.
  
• Ongoing investments in Horizon 2 growth opportunities, including international dual listings and customer-driven initiatives, are likely to help diversify revenue sources and position the company for sustainable earnings growth.

ASX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASX's revenue will decrease by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.3% today to 44.0% in 3 years time.
• Analysts expect earnings to reach A$541.3 million (and earnings per share of A$2.78) by about February 2028, up from A$487.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, up from 26.3x today. This future PE is greater than the current PE for the AU Capital Markets industry at 18.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

ASX Future Earnings Per Share Growth

Risks

• The shift to a more regulated pricing policy for cash equities clearing and settlement may constrain ASX’s ability to increase prices within this segment, impacting future revenue growth.
  
• The investment in technology modernization and regulatory compliance requires significant capital expenditure and may lead to increased depreciation and amortization costs in the future, potentially impacting net margins.
  
• The ongoing ASIC investigation into the CHESS batch settlement incident introduces regulatory risk, which could lead to additional costs or penalties, potentially affecting net profits.
  
• The loss-making position of the Sympli joint venture is linked to uncertainties in the e-conveyancing market, with a lack of progress in interoperability potentially impacting ASX’s overall earnings.
  
• The ongoing investment in Horizon 1 and cost-conscious initiatives may not yield immediate returns, posing a risk to short-term earnings and net margins despite the focus on long-term strategy.

Valuation

• The analysts have a consensus price target of A$65.908 for ASX based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$77.0, and the most bearish reporting a price target of just A$56.15.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.2 billion, earnings will come to A$541.3 million, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of A$66.03, the analyst price target of A$65.91 is 0.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.