Continuing the theme of looking for stocks that are quality compounders, this week I looked for a stock that was both a quality compounder but also scored reasonably well on the value side. To find such a stock I had to relax my quality criteria slightly, but doing so led me to ASX (ASX:ASX).
The ASX is of course a household name, being the dominant stock exchange in Australia and the eighth largest securities exchange in the world. It derives its revenue from four main business lines:
Markets - 28%
Securities & Payments - 27%
Technology & Data - 24%
Listings - 22%
In addition, their large cash balances contributed net interest income of $32 million in the first half of FY23.
This fairly even spread of revenue across different aspects of the business creates a fairly stable revenue base. Revenue actually grew quite strongly from $636 million in 2013 to $1,095 million in 2019, but has been flat since, coming in at $1,097 in FY22 and an expectation for $1,016 in FY23.
Source: ASX, Investor Day Presentation slides, 6/6/2023
Operating margin has been declining due to increasing expenses, but is still at a very high level compared to other companies, including when benchmarked against other global exchanges. Return on equity has been around 13% in recent years, but will dip this year, following the debacle that was the CHESS replacement project.
ASX has received a lot of criticism for its handling of the project to replace its equity settlements system, CHESS, which is now over 30 years old. They embarked on an ambitious project to use blockchain technology but it was plagued by delays and finally axed last year. This has resulted in the share price declining 32% in the last 12 months.
But temporary operational problems can provide long term opportunities for the patient investor. Of course, the trick is to be certain that they are temporary and will not present an ongoing drag on the business, or worse, turn into an insurmountable problem.
Given ASX’s dominant position in the market and the essential nature of its services for the Australian economy, the regulators keep a very close eye on it. A new CEO was appointed last year and she is making steps to…
