Macquarie has upgraded ASX Ltd (ASX: ASX) shares to outperform (from neutral) and lifted its 12-month price target to $64, implying around 16% upside in total shareholder returns (including dividends).
ASX Ltd is best known as the company behind the Australian Securities Exchange, the beating heart of the nation's capital markets. It provides trading, clearing, and settlement services for equities, ETFs, and derivatives, as well as market data and technology solutions.
As a securities exchange, its fortunes are closely tied to investor activity, trading volumes, corporate listings, and the broader health of financial markets.
Why Macquarie is bullish about the ASX 200 stock
The broker's upgrade comes after a solid run, with months of higher trading volumes for the ASX across both equities and futures markets. The ASX has seen total capital raised in October surging to $9.4 billion, up from $3.1 billion a year earlier. Cash equity trades jumped 51%, and futures and options activity was up 17% year on year.
The ASX 200 stock has also been strengthened by the news that rival exchange CBOE Global Markets will exit its Australian operations. That, according to Macquarie, supports the view that the Australian market is too small to support additional competition to the ASX.
So with the ASX in a de facto local monopoly situation, that should provide pricing support in the medium term.
Analysts at Macquarie believe this momentum, combined with easing competitive pressure and a more attractive valuation, makes the ASX 200 stock cheap enough to buy. The stock now trades at approximately 22 times forward earnings, around 10% below its three-year average and a 15% premium to the S&P/ASX 100 Index (ASX: XTO). This is well below the 50% premium the ASX has commanded historically.
However, it's not all roses as Macquarie still expects higher costs ahead, with capital and operating expenses forecast near the upper end of guidance due to regulatory reviews and technology upgrades. It also bakes in $15 million in extra pre-tax costs related to ASIC's ongoing inquiry.
Even so, the broker says these headwinds could already be priced in. It sees improving returns from equities and futures activity and a potential re-rating as the company restores growth credibility following several years of heavy technology investment and regulatory scrutiny.
ASX 200 stock Foolish bottom line
After lagging the broader market, ASX shares may finally be at a turning point. Macquarie's upgrade reflects a view that the worst of the regulatory drag is behind it, and the stock's defensive earnings, high dividend yield, and monopoly-like market position look appealing again.
With a 16% expected total shareholder return over the next year, ASX Ltd might just be trading at the intersection of stability and opportunity.
