A big day for the ASX Ltd
(ASX:ASX) , the company that controls the country’s main stock and futures markets.
A newish CEO, board changes, a log of projects dropped (at a multi-million-dollar cost), new profit and dividend targets, a first ever bond raising, and a promise to give the market an improved, working trading and settlement system.
It’s a long list to things ‘to do’ for ASX CEO Helen Lofthouse who is in her 12th month at the company.
At the company’s first investor day on Tuesday, Lofthouse set out a five-year plan to turn the re-position ASX Ltd for the future.
There will be a price for shareholders used to comfortable high dividend payouts and low expenses: higher costs for at least the next two years, a lowered dividend payout range and a commitment to take on a lot more debt.
Investors, used to the almost painless (except for the breakdowns in the Chess system) extraction of big dividends from ASX Ltd, gave the new strategy a big thumbs down on Tuesday, selling the shares down more than 11% to $59.06 at the day’s low as they worked out that the higher costs, debt, interest charges and lowered payout would hit the size of the company’s dividends and its price/earnings ratio.
ASX shares eventually ended down 10% at $60.64.
The new CEO has already proven herself by killing off the blockchain-based dealing and settlement system at a cost of a quarter of a billion dollars.
In doing that she and the ASX will keep the outdated CHESS system operating until 2032 with the occasional Band-Aid and more to keep the Federal government, the Reserve Bank and ASIC happy – not to mention investors who use the exchange.
She’s focusing first on winning back the trust of its regulators and getting the Chess replacement project back on the road – just achieving that will be a huge achievement after the $250 million lost on the fruitless blockchain adventure.
She’s got ideas for new businesses such as data mining and selling the developed products, as well as developing markets (such as carbon trading) that will be required for the energy transition.
Hopefully that will make up for the ASX missing the boat on products iron ore and coking coal futures (now based on the Singapore Exchange and the most important futures market for both commodities not controlled by China.
In a statement on Tuesday, the ASX talked about new areas of focus for the company which “will require capital management flexibility which balances the investment needs of ASX while delivering long term sustainable value for our shareholders.”
The briefing included new financial guidance and guidelines which make it quite clear that the ASX will be an investor and supporter of new risks and new ideas, unlike the old ASX which seemed to be aiming at rewarding shareholders and trying to reinvent the wheel with the wasteful one off blockchain-based dealing and settlement system
The ASX and Ms Lofthouse said the company would be spending more this year and next – she told the market to expect a 12% growth in costs for the year to June 30 (this year) and 12% to 15% for 2023-24. That will be considerably faster than the 7.5% guide in 2021-22 to $334 million.
The presentation said the rise in 2023expenses will be “driven by CHESS related regulatory and assurance costs and CHESS replacement solution design”. The larger rise next financial year will be “to support the ‘reset’ horizon of the five-year strategy and ongoing regulatory and technology modernisation costs.”
Expenses growth is expected to moderate in 2024-25
The higher expenses will see capex capital expenditure guidance of approximately $9 million for 2022-23, which will jump to a range of $110 – $140m for 2023-24. Capex for 2021-22 was just over $105 million, so the increase here is not startling.
The rise in the 2024 financial year will be due “to supporting technology modernisation, and regulatory and risk plans through delivery capability and program governance uplift work.”
For shareholders the most important change is in the company’s capital management settings.
While the 2022-23 dividend payout ratio policy will be maintained at 90% of underlying net profit after tax (NPAT), “From FY24, dividend payout ratio policy revised to a range of between 80 – 90% of underlying NPAT.”
As well the ASX will make its first debt issue – a “corporate bond with a value likely in the range of $200 to $300 million (subject to market conditions and board approval)”. This will likely be issued in the six months to December 2023.
At December 31 last year, ASX only had $50 million of debt in its balance sheet, compared with none the year before, so there will be higher interest costs from now on.
Finally, the company will introduce a medium-term target range for underlying return on equity (ROE) of 13.0% – 14.5%.
Ms Lofthouse said: “With a strong balance sheet, leading positions in key markets and structural tailwinds, ASX has an attractive core business and we must continue to invest in order to grow and to support the financial markets effectively.
“We recognise there are near term, situational challenges that we must address, including our regulatory commitments and our expanded technology modernisation program.”
“This is a multi-year investment to secure the foundations for ASX to achieve our full potential and deliver long-term sustainable value for our shareholders, customers and people.
“Having the right financial settings will support our new five-year strategy, which is designed to ensure ASX can deliver on its purpose of enabling a fair and dynamic marketplace for all,” she said in yesterday’s briefing.
