ASX Limited (ASX) – Diversifying portfolio yield
The ASX is a stock we have often thought would fit the Active Income Portfolio well. While its yield may be lower than our target, we offset that by holding some positions with a yield higher than our target, with the ASX making up for it by improving the quality and certainty of earnings. The concept that a portfolio is like a footy team, made up of different sorts of players charged with different roles is a good one, and we should think about the outcome from a collective (team sense) rather than in terms of individual stocks (players).
The ASX handles the majority of Australia’s trading activities on a daily basis and this gives it a critical role in our financial system. Its diversified revenue base comes from various sources, including trading fees, clearing and settlement services, listing fees, and data sales. This diversification in its revenue helps provide a stable income base, even in times of volatility in trading volumes. A robust regulatory framework governs it, creating a significant entry barrier for any competition.
- It currently trades on a valuation 10% below its average with a forecast yield of 3.2% fully franked for the coming 12 months – we could do worse!
The ASX is trading on the cheaper side due to many well-publicised issues, as it has tried and failed so far to rebuild the ASX’s CHESS system. Yesterday, CEO Helen Lofthouse said the total cost would be $445mn, which is ~$200mn more than the $250mn write-down it took when it mothballed the original blockchain version back in November 2022. While high, the number was within their prior stated guidance for capital expenditure of $160-180mn per annum between FY25-27.
We suspect that given the heat on the ASX around disclosure, which has led to ASIC accusing the exchange of misleading the market, they will be very conservative in their guidance. If we further believe that the IPO window is about to open in Australia, with Trump 2.0 underpinning global capital markets and lower interest rates eventually helping sentiment in the smaller end, it’s very plausible to think that the operating environment could well improve markedly for the ASX.
