Digitization And Modern Pricing Models Will Secure Future Advantage

Key Takeaways

• Growth in technology and data services, alongside market participation, supports diversified and recurring income, driving margin and earnings stability.
  
• Technology modernization and regulated pricing enhance operational efficiency and net profit stability, mitigating risks from competition and regulatory changes.
  
• Rising costs, regulatory scrutiny, execution risks, increased competition, and industry shifts threaten ASX's profit margins, revenue growth, and long-term market dominance.

Catalysts

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

• Strong growth in operating revenue from markets, data, and securities/payments businesses, combined with continued product and data innovation (e.g., new debt market and trading activity data products, accelerated technology modernisation, launch of scalable infrastructure-as-a-service solutions), positions ASX to capture ongoing revenue growth from increased digitization and financialization of the economy-particularly as retail and institutional participation rises.
  
• Positive momentum in net new capital quoted and increased IPO and secondary listing activity, supported by growth in Australian household wealth and superannuation assets, suggest sustained upward pressure on trading volumes and listing revenues as long-term domestic capital pools expand, translating into higher recurring revenues.
  
• Expansion and demand in high-margin technology and data offerings-driven by appetite for analytics, connectivity, and market information from both domestic and global market participants-provides opportunity for recurring, diversified non-transactional income, supporting overall margin expansion and earnings stability.
  
• Progress on the multi-year technology modernization road map, including the upcoming go-live of the new CHESS settlement system, underpins operational efficiency, risk management, and resilience, which should lower costs, improve customer experience, and ultimately expand net margins over the medium term.
  
• Implementation of regulated infrastructure pricing models (building block approach) for core clearing/settlement business provides predictable and stable targeted returns on allocated capital, limiting downside margin risk from potential fee competition or regulatory intervention, and supporting long-term net profit stability.

ASX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASX's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.0% today to 42.6% in 3 years time.
• Analysts expect earnings to reach A$548.3 million (and earnings per share of A$2.85) by about August 2028, up from A$502.6 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 29.5x on those 2028 earnings, up from 24.8x today. This future PE is greater than the current PE for the AU Capital Markets industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

ASX Future Earnings Per Share Growth

Risks

• Rising cost pressures-particularly from technology, regulatory compliance, and project-related headcount-are driving expense growth well above inflation (guidance of 8–11% core business expense growth for FY26, and 14–19% including ASIC inquiry costs), which could compress net profit margins and limit earnings growth if revenues do not keep pace.
  
• Intensifying regulatory scrutiny, highlighted by the ongoing ASIC compliance assessment and inquiry, could lead to recommendations or requirements for costly further investment in risk management, governance, and capability, or even tighter oversight and fee regulation, negatively impacting both costs and revenue flexibility in the long term.
  
• Execution risk remains high around the ongoing technology modernization and CHESS replacement programs, with management admitting the business is "not where we want to be" on operational risk and resilience; delays or failures in key projects could increase costs, damage reputation, and potentially lead to client attrition or market share loss, directly hurting revenues and margins.
  
• Competitive pressures are escalating, especially with the potential entry of Cboe Australia as a listings market and the broader choice of global and domestic exchanges for new listings and capital; this could erode ASX's historic listing fee revenues and force more aggressive pricing or incentives, impacting revenue growth from its listings business.
  
• Fee compression and industry-wide shifts, such as the migration of activity to lower-cost alternatives, increased digitalization, and the threat from alternative financial infrastructure or decentralized platforms, put long-term pressure on ASX's ability to sustain high margins and premium valuation, raising risks to both top-line revenue and recurring non-transactional income streams.

Valuation

• The analysts have a consensus price target of A$66.512 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$54.05.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.3 billion, earnings will come to A$548.3 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of A$64.06, the analyst price target of A$66.51 is 3.7% higher. 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.