A multitude of factors have weighed on investor sentiment towards ASX Ltd (ASX:ASX) over the last ~6 months. These include heavy ongoing investment requirements, cost pressures, regulatory & operational risk, and a modest earnings growth outlook. We recently researched the Company in The Dynamic Investor. Our analysis focused on whether these concerns were overdone and whether the risk-reward was becoming more favourable.

About ASX Ltd

ASX Ltd (ASX) operates Australia’s primary national securities exchanges. This includes the provision of securities exchange services, derivatives exchange services, central counterparty clearing services, and registry and settlement. The Company has four segments: Listings, Markets, Technology & Data and Securities & Payments.

Key Fundamental Drivers

Mixed Revenue Growth Outlook

Revenue trends for the 1st quarter of FY26 (1Q26) were mixed, with sustained growth in cash equity turnover offset by flat futures volumes (+0.2%) after a rebound in September. Accordingly, there is modest upside risk for cash equity turnover expectations, but downside risks remain for consensus futures volumes, despite the latter increasing by 21% in September following three months of declines.

Revenue growth for futures (24% of FY25 group revenue) is likely to be impacted by the ongoing reduction in average fee per contract. This mainly reflects increased rebates to traders and mix changes, such as the shift away from electricity futures (which are higher margin) but saw lower volumes due to reduced volatility in electricity prices).

New Product Initiatives to Aid Revenue Growth

ASX has the potential to drive revenues from new products. These growth opportunities are considered more medium than short term. This partly reflects the likely lead time to scale up the products to be a material revenue contributor. Some of the key initiatives include:

i. For Austraclear, ASX launched a new debt market activity report in 2H25, the product provides aggregated repo, bond and money market activity data. Further out, ASX is expanding Austraclear to include multi-currency capability targeting to launch in FY26.

ii. ASX continues to build its technology & data business to capitalise on the growing demand for data. It launched ASX Colo OnDemand, a fully managed infrastructure as a Service solution. This product enables faster onboarding and access to ASX’s trading services without on-premise equipment.

iii. ASX added new products such as environmental and additional interest rate futures. It also de-linked bond futures contracts from the spread market, which should increase volume and revenue in FY26.

Operating Leverage Constrained by Higher Costs

ASX faces elevated cost growth for at least two more years given committed investments in technology modernisation and higher regulatory spend. The Company has lifted its total cost guidance in FY26 by ~7.5%, with Company guidance for total cost growth of 14%-19% per annum in FY26.

Total cost growth for FY26 may be at the top end of, or exceed, the guidance for total costs growth of +14%-19%. This is due to two factors. Firstly, ASIC’s broad-ranging review due in March 2026. Secondly, the Reserve Bank of Australia’s (RBA) most recent annual assessment of ASX’s clearing and settlement facilities flagged concerns with resourcing capacity of ASX’s CHESS replacement project.

While some cost growth in FY26 is of a one-off nature (i.e. ASIC Inquiry), cost growth could continue into FY27/28 given the potential for recurring increased in operating expenses arising out of the ASIC Inquiry.

Given the cost headwinds and likely slowing revenue momentum, operating leverage is likely to be constrained until FY27 or later.

Is ASX at Risk of Becoming a Less Attractive Yield Play?

Given the current project pipeline, elevated CAPEX requirements are likely to restrict free cashflow growth. The Company’s CAPEX guidance for FY26 is unchanged at $170m-180m, while similar levels of CAPEX are guided for FY27 ($160m-180m) before CAPEX is expected to start reducing after FY27.

Accordingly, restricted free cashflow growth raises questions as to whether the elevated dividend payout ratio is sustainable. The FY25 dividend of 223.3 cents per share (208 cents per share in FY24) represented an 85% payout ratio and is in the middle of the target dividend payout ratio range 80-90%.

Fundamental View

ASX shares are currently trading on a 1-year forward P/E multiple of ~22x. This multiple the below the average of ~25x over the past three years and at the bottom end of the trading range over that timeframe. Notwithstanding, we find limited investment appeal in ASX in light of:

i. The current multiple being broadly in line with global peers (~23x) and demanding in the context of a modest EPS growth profile (+1.8% over FY25-28 on a CAGR basis).

ii. The risk of higher-than-expected cost growth de-railing any revenue uplift from benefits from new product initiatives and improving volume trends for the Listings segment.

Charting View

The rally from late 2023 to mid 2025 now resembles that of a large bear flag (diagonal blue lines). ASX has fallen out of this bear flag and it now appears as though it will continue to trend lower. There will be some support near $54 but there is a risk of ASX falling to levels below that.

 

Michael Gable is managing director of Fairmont Equities.

 

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