JP Morgan has cut its price target for ASX Ltd (ASX:ASX) by $5 as the Australian stock market operator is pulled into a parliamentary committee hearing session regarding its bungled internal software overhaul.
Shareholders will be familiar with the CHESS system, which can simply be thought of as the internal software the ASX itself uses to manage the flows of daily trades on the market.
In short, the ASX was looking to replace that software with something better, and that process turned into a $250m exercise.
This week, it came to the fore the ASX has basically written off that $250m, with no real solution to replace CHESS after years of work. Deloitte flagged this outcome as being likely in a little known report published three years ago, which obviously went largely ignored within the bowels of the bourse operator.
(For the traders in the know, it appears you’ll still be getting lots of paper mail brandishing the CHESS acronym for the time being.)
JP Morgan has brought down its price target for ASX from $78.30 to $73.00.
The bank notes “there is significant regulatory disquiet about how [government entities] had been updated on the progress of CHESS and appear to be seeking additional powers to provide greater ability to supervise key financial infrastructure.”
It added what these powers may look like is still unknown.
Also on JP Morgan’s radar in terms of risk:
ASX will likely need to spend more capex to keep CHESS running, on top of that for replacement system
Possible disruptive executive board changes at ASX brought about by government action
Possible action to be brought by investors if reimbursements are not made for those “who invested in their own systems”
The next project to replace CHESS could result in harsher regulatory responses if there are hiccups; JP Morgan describes the ASX as being “on notice” by ASIC
JP Morgan, in its thesis for its downgrade, notes the ASX remains exposed to short-term headwinds, inflationary pressure, and a downtrend in company listings and raising activity.
It also notes capex has been high over the last few years (with a big part of that being the failed CHESS replacement debacle.)
On top of this, JP Morgan adds secondary capital raising in November 2022 was down 30% year-on-year, but noted this is in line with its forecast for conditions going into 1H 2023.
Futures trading in November, however, has rebounded by 16%.
On the other hand, JP Morgan also sees ASX poised to benefit from long-term growth and highlights what is ultimately a lack of any real competition.
Competition, however, could be a more desirable threat than the sword of ASIC now dangling over the stock market operator’s head.
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