ASX receives wrath from shareholders and regulator alike

Multiple hat-wearing as both monopoly provider of clearing and settlement services, and overseer of governance and risk management is something that the ASX (ASX: ASX) appears to have repeatedly struggled with.

Serving both masters is clearly something of tightrope walk for the ASX, and it’s easy to conclude that adequately serving the needs of one cohort typically comes at a price for the other.

However, this time around, no one appears to be happy.

FY22 result

While singing the company’s praises at the AGM yesterday, chairman Damian Roche was quick to highlight how the diversified business has generated reliable returns to shareholders.

At full year FY22 ASX’s operating revenue was up by a record 7.5% to over $1bn, while statutory profit was up around 6% to more than a record $508m on last year.

Source: ASX

First strike

However, despite the solid FY22 result, not all shareholders at yesterday’s AGM were smiling, with 30% voting against the 2022 remuneration report, including a $1.2m bonus, spread over four years, to former CEO Dominic Stevens.

A first strike against executive pay policies follows numerous delays to its CHESS replacement project.

Assuming delays to financial infrastructure upgrade continue, shareholders may vote for second strike next year and this could result in board spill.

FY23 Guidance

In an attempt to appease disgruntled shareholders yesterday, CEO Helen Lofthouse advised shareholders that despite a decline in total capital raised and inflationary pressures, the company is still on track with 2023 guidance.

At the full year, the company guided to expenses growth of between 10% and 12% and capital expenditure - including staffing and investment in risk management - of between $115m and $125m for FY23.

“Total capital raised is down compared to the prior year, which was particularly strong,” Lofthouse advised.

However, we have seen a recovery in futures volumes, particularly at the short-end, which is expected to continue in this rising interest rate environment.”

Must do better: RBA

Shareholders weren’t the only cohort pointing a finger at the ASX yesterday.

Following a scathing assessment of the ASX's cleaning and settlement facilities, the Reserve Bank (RBA) warned the share market operator it needed to pull its socks up to ensure its regulatory obligations were being proactively met.

The central bank’s assistant governor Brad Jones reminded the share market operator that:

• The safe and timely replacement of CHESS remains a high priority for ASX

• It needs to make significant progress in addressing recommendations on governance management

• The RBA wants action taken before the end of the year

• Delays in keeping the RBA informed in a timely manner on the CHESS replacement program – which has been delayed four times - are unacceptable

Further downgrades

The RBA also warned the ASX that a recent downgrading of it risk framework for managing ASX Clear, ASX Clear (Futures), ASX Settlement, and Austraclear could be followed with further downgrades on the governance of its clearing and settlement systems.

“The bank also views prompt progress in addressing recommendations on governance and the framework for the management of risks as important in ensuring that ASX continues to promote overall financial stability in the longer term and expects ASX to take a more proactive role in ensuring that its regulatory obligations are being met.”

What brokers think

The ASX share price is down -12% over 12 months but was up 1.86% at the close today.

Consensus on ASX is Hold.

Based on Morningstar’s fair value of $76.28 the stock appears to be undervalued.

Based on the seven brokers that cover ASX (as reported on by FN Arena) the stock is currently trading with 13.6% upside to the target price of $80.92.

Macquarie suspects recent management changes may present an opportunity for the ASX to adopt a new optimal capital structure.

The broker retains an Outperform rating and $93 target price.

Both Ord Minnett and Morgans recently upgraded the ASX to Hold from Lighten and to Hold from Reduce, respectively.