There is a common saying in the market that suggests we should buy straw hats in the winter, implying that when things look bleak, that’s the time to be buying for more favourable conditions ahead. Or in other words, buy when nobody else is. It’s certainly been winter for our local exchange with the stock down 25% from its August 2022 high. It’s not a stock that we’ve looked at for a while so here’s our take.
The ASX has an incredibly attractive/solid position in our market and this dominance has made it a great investment over a long period of time. Competition has come but hasn’t made any real inroads into the core ASX earnings machine. It’s a high-margin business, that has grown earnings at a modest but consistent rate over time averaging around ~4% per annum. Its earnings are very defensive while it is forecast to yield 3.5% fully franked, or 5% grossed up. It’s trading on 25x earnings which seems expensive, however, that’s as cheap as it gets, with its 5-year average of 29x implying that it’s currently trading at a 14% discount to fair value.
For a stock like this to trade at a discount, something has happened, which is true for the ASX. They have totally ‘stuffed up’ the CHESS replacement system and spent a lot of money in the process. We get that it’s complicated and that ASX were a leader in this space globally, however, it’s clearly been a costly mistake so far. They are now targeting the announcement of the new CHESS solution design in 2Q24, meaning the uncertainty over this key project persists. In the meantime, it is flagging up to A$70m of “one-off” costs associated with the project. They will provide a more in-depth view of this project at their investor day on the 6th of June, an event we plan to attend.
- When we think about what the Income Portfolio is targeting, the defensive earnings & income provided by the ASX are attractive, and it’s now a stock we have on our Hitlist.
MM is neutral/positive the ASX, looking for a catalyst to buy
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