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Is the ASX Ltd share price cheap enough for dividend investors? 

Shares in ASX Ltd (ASX: ASX) have jumped over 7% since the operator of Australia’s primary stock exchange released its first half 2018 results last week, in which the company announced it had delivered a 5.1% increase on the prior year’s first-half net profit. 

Operating revenues were $409 million, which represented a $22.4 million, or 5.8%, increase on the prior comparative period. Revenue growth was supported by strong results across most key areas of the business, capitalising on a long period of low market volatility and positive investor sentiment.  

Listings and Issuer Services revenues were up 9.8% to $113.5 million, driven by higher secondary capital raisings and annual listings revenues. There were fewer IPOs but they drew more market interest, so total capital raised was comparable to first half 2017. The ASX called out increasing overseas investment as well as a growing technology sector as key drivers for market capital. 

ASX stated that recent tech listings such as Domain Holdings Australia Limited (ASX: DHG), WiseTech Global Ltd (ASX: WTC), NetWealth Group Ltd (ASX: NWL) and Link Administration Holdings Limited (ASX: LNK) drew particular attention from investors.

Since December 2014, total market capitalisation for tech stocks has increased by 140% to $63 billion. 

Revenue from Derivatives and OTC Markets was up 3.8% to $138.1 million due to increased futures trading, while Trading Services revenue was up 8.8% to $104 million mainly due to new information services like the Bank Bill Swap Rate (BBSW) benchmark which ASX commenced providing in January 2017.

The only business segment to decline was Equity Post Trade Services, where revenue was down 1.3% to $52.2 million reflecting a decrease in equities traded over the period. 

Expenses were $96.2 million, which was a good result considering it allowed the company to keep its full year cost guidance unchanged at 8% annual growth. Adjusting for several “step changes” such as rent and postage cost increases and an increase in the ASIC supervision levy, underlying expenses were only up 3.1%, driven mainly by annual staff remuneration increases. 

This combination of healthy revenue growth and effective cost management saw EBITDA rise by $16.3 million, or 5.5%, to $312.8 million, and NPAT increase $11.1 million, or 5.1% to $230.5 million.    

This was also a great result considering NPAT for 2H17 had actually been pretty subdued at $214.7 million, so this represents a significant shift in momentum. 

And good news for shareholders is that the company is maintaining its 90% dividend payout ratio, with the interim dividend set at 107.2 cents per share. Its current annual dividend yield is a healthy 3.72%.  

One thing to take note of is that only $13.4 million of a forecast $50 million worth of capex for FY18 was used in the first half, so ASX anticipates a significant ramp-up in 2H18.

The company plans to invest heavily in strengthening its existing platforms, as well as a replacement for its current clearing house system CHESS, and an upgrade in its secondary data centre. The future downstream impacts of these projects on the company’s income statement will be a possible increase in D&A expense. 

Foolish takeaway

Shareholders are right to be pleased with the company’s first half performance. Strong revenue growth across almost all business segments is a great result, and it represents a significant turnaround after a subdued 2H17. Plus, good cost management has kept expenses in line with guidance, and there haven’t been any nasty surprises.  

But, as the last few weeks have proven, volatility can return to global markets. And there is the possibility that volatility in equities could be spurred further by signs of rising interest rates.  

The ASX benefits from economic stability as junior companies will be more likely to grow to a position where they are able to list, and investors will be more willing to inject capital into the market. Although volatility does add to trading volumes.

When investor uncertainty returns and the market contracts, the ASX loses key sources of revenue, particularly in its Listings and Issuer Services segment. The threat to the ASX is that it may not be seen a dependable source of capital by new companies, and the overall volume of equities traded may decline. 

Overall a strong result for existing shareholders – but for those still on the sidelines it might be wise to keep one eye on the wider economy before investing. A more difficult second half could be on the horizon. 

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Motley Fool contributor Rhys Brock owns shares of WiseTech Global. The Motley Fool Australia owns shares of ASX Limited and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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