ASX

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Australian Stock Exchange (ASX) have an upgraded share price target of $47.93 from analyst Macquarie Research Equities (MRE). The Australian Stock Exchange (ASX) remains the stock analyst's preferred sector pick with momentum in trading volumes and velocity, likely further upside to synergy benefits and the monopolistic franchise of ASX and SFE trading, clearing and settlement functions support MRE’s investment thesis. Furthermore, MRE is forecasting a 50% improvement in ROE over the next four years, with possible further upside from improved balance sheet efficiency. February was a record month for trading activity, with the volume of trades and value up 52% and 35% respectively relative to PCP. Trading turnover is also currently at record highs, providing the ASX with an exceptional start to the year. Following an outstanding 1H07 result, where the company reported a profit and dividend that beat market expectations, Macquarie Research Equities (MRE) have reviewed their forecasts and outlook for ASX going forward and made the following changes. The ASX posted a record trading month during February, with 4.4 million trades transacted valued at $121 billion, which is up 52% and 35% respectively, relative to PCP. The heightened trading activity is associated with a busy reporting season and volatility sparked by global markets over the past week. Similarly, February was a record for the number of trades transacted on the SFE for that month, with a 25% lift in the volume relative to PCP.

Given the sustained levels of trading activity (YTD, the number of trades on the ASX is up 50% and the value of trades up 31%), MRE has upgraded forecast assumptions for 2H07 trading activity to 30% and 25% for volume and value respectively, which may still prove conservative if the current level of trading activity continues over the coming months. As discussed in MRE's interim results note, the guidance for $14–16m of cost synergies to be realised in FY07 is likely to prove conservative. Furthermore, the $19.1m premises restructure charge associated with the merger includes estimates of net losses on assignment and sub-lease options, of which part may be unwound over coming periods. MRE has reviewed synergy assumptions and increased forecast synergy benefits associated with the SFE transaction to $19m in FY07, with further benefits accruing in FY08 reflecting the full period benefit of occupancy and headcount reductions.

The analyst believes that further upside to synergy benefits exists as ASX explores the next phase of the integration process, which will involve a rationalisation of back-up data centres and possible convergence of trading and clearing platforms. The benefits of converging trading platforms are likely to be material, though longer dated. MRE have upgraded their earnings forecasts in FY07: +3.2%, and FY08: +3.8%. This follows on from additional upgrades MRE implemented post the result, FY07 +9.7% and FY08 +7%.

ASX Limited (ASX) have a retained Buy shares recommendation and a share price target of $41.88 (target price rising by 12 percent) from stock analyst Citigroup Investment Research (CIR). CIR have derived an option value of $3.44 per share from 3 key swing factors: (i) ASX cost cutting; (ii) SFE merger synergies; and (iii) future price rises. With 1H07 volume growth tracking ahead of CIR's FY07e assumptions for equities and futures, CIR have raised their FY07e volume growth forecasts to +21% for equities (YTD +28%) and +19% for futures (YTD +22%). This implies 2H07e volume growth of 15% for both equities and futures. The combination of a softer SFE fee adjustment than expected and an upgrade to CIR's volume forecasts has resulted in mild EPS downgrades of -0.5% in FY07e, -2.2% in FY08e and -0.6% in FY09e.

Stock analyst, Citigroup Investment Research (CIR) have reiterated their Buy rating for the Australian Stock Exchange (ASX) stock with a $37.32 share price target. The CEO is currently reviewing the recently revised equity pricing model and in the analysts view, the value-based model is superior to the volume-based model. According to the analyst, this is because:

1. it provides users (i.e. the brokers) a basis for direct cost comparison with the European and Asian exchanges which could improve ASX’s ability to raise prices where it lags its peers (particularly in Asia);