Why Asx Keeps On Keeping On

Sun Herald

Sunday November 20, 2005

David Potts

Here's one stock you'll find hard to lose on, David Potts writes.

ONE of the best ways to invest in the sharemarket has been, well, investing in the sharemarket. Shares in the Australian Stock Exchange, ASX, to be precise.

The only trouble is that, like the sharemarket, ASX is not exactly cheap.

Even so, it has a few unique things going for it. Its monopoly is obvious enough, with the bonus that it's its own boss as well. It monitors itself and basically the corporate watchdog, the Australian Securities and Investments Commission (ASIC) gets involved only if the ASX asks. Not a bad gig, eh?

Apart from a couple of minuscule stock exchanges serving a niche market, the ASX doesn't want anyway: the only competitor is the Sydney Futures Exchange (SFE) and that's confined to futures trading.

Come to that, the SFE is an obvious takeover or merger target for the ASX.

Still, globalisation makes the ASX a bit of a minnow.

The shift of what was Australia's biggest stock, News Corporation, to the New York Stock Exchange is an example of the threat that overseas exchanges pose to its monopoly. In a world without financial borders ASX looks a lot more vulnerable because exchanges such as London and New York are much deeper markets, making it easier and, more to the point, cheaper to raise capital. The ASX earns about one-quarter of its revenues from floats and listings.

Speaking of which, apart from Tatts, the ASX hasn't had a good float for a while. But this is about to change with the just-completed Macquarie Media and the coming Goodman Fielder.

The more immediate uncertainties the stock faces is that ASIC is reviewing the regulatory arrangements, where you could say there's room for improvement, while ASX itself has a strategic review under way.

Analysts are looking for cost cuts too, but then they always are. While the booming sharemarket won't go on forever, a correction isn't the threat you'd think. So long as trading is heavy, it doesn't matter which way prices go. True, a severe correction, or even a prolonged period of going sideways, would hurt the stock because trading volumes would dry up.

In the meantime ASX is trading about $5 above the most generous broker's forecast of its value. It's also trading at a price/earnings multiple higher than the market average, suggesting either the stock is expensive, the view of most analysts, or it still has some growing to do.

ADVANTAGES

? Record sharemarket turnover, earnings and dividends.

? Has commenced a cost-cutting strategy.

? Pays 90 per cent of earnings in dividends and has surplus franking credits.

? Monopoly business within Australia.

? An estimated $5 billion of floats are in the pipeline.

ISADVANTAGES

? ASIC considering regulatory changes.

? Prospect of a sharemarket correction.

? Trading at a high price/earnings ratio, making it expensive.

? Needs more scale as other global exchanges increasingly grab its business.

? Uncertainty over regulatory and strategic reviews.

VERDICT

Should be a sell because of its high price, but this is a stock that, like the market, just keeps on keeping on.

© 2005 Sun Herald

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