Australian Stock Exchange

The Australian Securities Exchange (ASX) remains the preferred exposure from stock analyst Macquarie Research Equities among the diversified financial sector. This reflects significant upside relative to the analysts' 12 month price target of $62.21.

ASX Limited has a share price target of $52.80 and a Neutral recommendation from Australian stock market analyst UBS. Australian securities regulator ASIC has completed its initial consultation on licence applications from potential niche competitors AXE ECN and Liquidnet in late August. ASIC has announced that it will now publish a response document in October 2007 vs. expectations for a formal recommendation to the Federal Minister in mid-September. The need for clarity around the appropriate "rules for competition" may lead to substantial regulatory or policy changes. A Federal election also poses an obstacle, potentially deferring or interfering with a Ministerial decision. This implies that competition, if any, appears unlikely until into CY 2008. Tha analyst has recognised some issues to include: (1) relevance and prescription of pre and post trade transparency for 'internalised' order flow (2) downstream implications on supervisory/regulatory structure, including potential centralisation (3) relevance of overseas market structures and experience to the Australian marketplace. This is by no means a permanent outcome for ASX. However it will likely result in a more manageable and prescriptive shift in market structure, an incremental positive in our view. Read a previous ASX Limited Update.

ASX Limited has a Neutral 2 recommendation and a share price target of $52.80 from Australian Stock Exchange analyst UBS. June 2007 volumes close off another record year: June volumes showed an acceleration of recent growth rates. On a daily avg basis: Cash market turnover was up 60% on pcp at $7.2bn p/day; Cash market trades increased 92%. Futures contract volumes increased 29%; Options increased 24%. Modest net upgrades on turnover and volumes: Including the effect of ASX's one-off additional $8.5m rebate in 2H07, we upgrade FY07E by nearly 5%. This largely flows through to FY08E given rebate structures in cash and futures markets. In addition, a more slightly optimistic (but still cautious) view on capital raisings activity within listings revenue adds an increment to FY08E earnings for 6% total upgrade. ASX positioning as a 'defensive growth' stock: The analysts' recent scenario analysis highlighted ASX as likely providing double-digit (or better) earnings growth under a range of flat or negative volume growth outcomes. Upside leverage to market activity growth is muted by the 75% incremental rebate to customers (25% to shareholders). However, with a CTI ratio in the high 20’s shareholders still benefit from significant operating leverage. New DCF-based price target $52.80, Neutral 2: PT = DCF x (1+WACC) – dividends. Positives for ASX Limited: (1) defensive revenue, with ~$60m of rebates in FY07E (2) strong operating environment (3) low capital intensity. Risks from the Australian Stock Exchange: (1) clearing capital demands (2) listings capital raisings cycle a revenue risk (3) still some technology capex to come.

ASX Limited has a retained outperform recommendation and $53.37 price target per share from Sharemarket analyst Macquarie Research Equities. The ASX yesterday provided a pricing update for the cash equities and SFE markets. This entailed an increase in the cash market rebates for FY07, a cap on the charge for clearing crossed trades, and a simplification of the SFE pricing regime. Following an impressive 30% rise this year, The analysts retain their Outperform recommendation stating that further upside could be gained through a continuation to the strength in investment markets, strong trading activity, SFE synergies, and a solid FY07 result. Refinement of the equities price regime: The ASX Limited announced an increase in the cash market rebates for FY07, to "over $24m", from $16m previously. In effect, the quantum of this rebate is as if a 75:25 gain-share in favour of participants had been adopted since 1 January 2007. The ASX has also refined the charge for clearing of crossed trades in FY08, introducing a $5 cap per side, or $10 per trade. Furthermore, the transitional rebate guarantee for FY08 will be $24m, rather than the $16m as advised previously, assuming that ASX cash equities revenue does not contract. These changes have reduced our FY08 forecast revenue by 1.3%. Fee reductions offset by improved trade volumes: Despite the negative impact of the higher broker rebates, this has been more than offset by a change in assumed trading volumes. As the analyst has flagged for some time, FY08 forecasts previously assumed a material deterioration in trading volumes. They have revised FY08 value and volume growth to 25% and 35% respectively, which is a moderation from the 30% and 51% recorded in FY07. Relative to other exchanges, the ASX Limited has a unique pricing structure as it has put in measures to insulate the volatility in revenue, with the broker rebate being used as the mechanism. In practice, the revised price regime will reduce revenue volatility at the same time as encouraging growth. SFE price regime to be simplified: The ASX has replaced a three-tiered qualification scheme to calculate SFE rebates to a one-tiered scheme, whereby 75% of the exchange fees earned from eligible traded volumes above 73.38m contracts will be paid to the large volume rebate scheme pool. This is a better outcome than what we had previously modelled. However, the full impact of the SFE price changes remains unclear as the ASX plans to remove the local participant category and revise the rebate structure, of which details will not be disclosed until September 2007. Other changes at the edges: In other fee changes, the ASX announced fee reductions for Exchange for Physicals (represents less than 1% of revenue) to 60¢ from 75 cents, and higher charges were flagged for Austraclear annual fees (represents 0.2% of ASX total revenue). Merger-related expense saving targets faster than expected: The ASX mentioned in the pricing update that "the ASX had been successful in achieving its merger-related expense saving targets faster than expected." No further clarity on this brief statement was provided.

Meanwhile, the ASX have a maintained Neutral 2 broker call and a $50.80 share price target from sharemarket analyst UBS. Announces new fee and rebate structures: ASX today announced its FY08E fee and rebate structures. (1) The equities growth hurdle for the rebate has been set at 12.5%, in line with expectations (2) there will be a one-time $8.5m cash market rebate, an unexpected move (3) introduced a $5 per side clearing fee cap for crossings (4) announced 73.38m FY08E volume hurdle for the SFE market, past which 75% of incremental fees will be rebated. Impact: c2% earnings dilutive: They estimate that the changes will potentially reduce our forecast ASX EPS by c2% in FY07E and FY08E. However, they note that the one-off $8.5m equities rebate may have been ‘paid for’ by better than expected cost-out and synergies stemming from the SFE merger. They also note that a volume mark-to-market suggests c3%upside, offsetting the likely impact of today’s announcements. They maintain our Neutral 2 rating on valuation grounds, given ASX’s strong performance year to date. They have run detailed sensitivity analyses on ASX, showing likely double digit (or better) earnings growth under a range of volume growth scenarios. Price Target = DCF x (1+WACC) – dividends. Key positives: (1) earnings revisions remain positive (2) fee structures protect shareholders with ~$50m of rebate in FY07E (3) efficiency opportunities. Key risks to ASX: (1) clearing services may be more, not less capital intensive (2) equity capital market cycle (3) valuation stretch.

Shares analyst UBS have a look at which shares Outperform when the Australian dollar rises. The analyst: The obvious way to measure a share's currency sensitivity is to look at its EPS sensitivity. However, the shares analyst note that this ignores what else is going on when the Australian dollar (A$) is rising.

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%.

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);