Stock exchange owner and operator ASX Ltd (ASX: ASX) is for all intents and purposes the sole provider of stock exchange services in Australia. Chi-X is a newcomer, but nowhere near the scale to challenge the ASX. This essentially makes the ASX a monopoly-type firm with many appealing business attributes.
The company has just released a solid set of half-year numbers, which makes it a good time to review the stock and consider if it would make a good addition to a portfolio.
Interim Results
- Operating revenues increased 8% to $329.3 million
- Net profit after tax increased 10.8% to $189.6 million
- Earnings per share (EPS) increased 2.2% to 98.2 cents
- Fully franked interim dividend increased 0.3% to 88.2 cents
Growth Initiatives
Unlike some monopoly-like companies, ASX is always at risk of competitors so this forces the company to be innovative. Two recent initiatives which have the potential to drive revenues meaningfully higher in future periods are:
1) The ASX Bookbuild service which is an effective system for raising capital.
2) mFunds which is a new settlement service for investing in managed funds for the retail market.
Forecasts
Management failed to provide specific guidance in the results release, however Morningstar's analyst consensus data shows full-year EPS of 197.7 cps and dividends of 179.2 cps. Both forecasts look achievable based on the half-year results. With the share price at $36.40 this implies a FY 2014 PE and yield of 18.4 and 4.9% respectively.
Foolish takeaway
The recent flood of initial public offerings (IPO) raised $17.8 billion and was a nice tailwind for ASX. With expectations that there will be more IPOs in the second half this momentum should continue albeit at a more moderate pace. The ASX's cornerstone holding in listed information and systems' provider Iress Ltd (ASX: IRE) is also handy as it creates optionality for the ASX.
Ultimately the quality of the ASX's business with its entrenched market position makes the company a great contender for addition to a long-term portfolio. With momentum in its favour the near-term outlook for ASX is reasonably good. However the potential for competition to reduce margins in the future means investors should demand a margin of safety before investing. For this reason, investors may be best off placing this one on their watchlist and monitoring for a better entry point.
