Huntleys' Stock of the Week

Recommendations: Accumulate

ASX's current stock prices

Earnings growth resumes

Investment Rating:

ASX operates Australia's largest national exchange for securities trading and is a simple franchise: a monopoly - though soon to be facing unproven competition - clipping the stock exchange activity ticket. The stock offers leverage to an improving Australian equity market but is not a straight beta play because the business is diversified, trading volume rebates cushion the effects of market volatility, and much depends on trends in the individual business lines. The cyclicality in the business is around a long-term uptrend. ASX is conservatively managed and financed. The desire of listed companies for maximum liquidity in their shares creates a natural monopoly for a stock exchange, which is ASX's competitive advantage.

Event:

• At the AGM CEO Rob Elstone said 'As long as first quarter activity momentum levels are maintained we would expect to return to a cash earnings (EBITDA) growth trajectory during the second quarter of FY10, net of a return to healthy levels of transaction fee rebates and based on flat-lined cash costs.'

Impact:

• This is consistent with our and consensus expectations.

• On the transfer of market supervision functions to ASIC the CEO said '...the transfer will be accounted for as a significant non-recurring item during FY10 and there is little likelihood the effect of the transfer will be earnings accretive to ASX shareholders on an ongoing basis.' Given the transfer will reduce ASX's recurring costs the comment seems to imply expectations for an industry supervisory levy charged by ASIC, as we recently suggested.

• ASX's Board claims shareholders are entitled to compensation for the intellectual and property rights to be acquired by ASIC as part of the transfer. There was a precedent when the NYSE transferred certain of its supervisory functions to the US regulator in 2007. Australian Financial Services Minister Chris Bowen promptly deflected ASX's claim, saying it was for ASIC to decide whether it needed to buy anything from ASX.

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