ASX sees higher expenses as Dominic Steven departs

ASX Limited chief executive ­Dominic Stevens has given notice that he plans to retire this year but has agreed to stay until a successor is found.

ASX chief executive Dominic Stevens has agreed to stay until a successor is found. Picture: Bloomberg

ASX Limited chief executive ­Dominic Stevens has given notice that he plans to retire this year but has agreed to stay until a successor is found.

Investor anxiety over the transition process combined with a blowout in expense growth pushed shares in the stock exchange operator sharply lower on Thursday. The stock fell 3.8 per cent to $83.41, making it the second-worst performer in the ASX 200 index.

Macquarie Equities analyst Andrew Buncome reiterated his “outperform” rating, saying he remained confident in ASX’s long-term outlook.

The change of CEO “opens the door for capital restructuring”, he said. But his target price of $103.50 was well above the consensus of $80.06.

JPMorgan analyst Siddharth Parameswaran said ASX revenues and net profit were slightly better than expected. However, the CEO transition was a “key negative”, as was a 7.6 per cent rise in expenses growth due to staff and costs related to ASX’s technology upgrade.

“As such there could be small market upgrades, taking into account the increase in expense,” he said. “The CEO departure may temper enthusiasm for the stock, signalling some potential risks in transition.”

Mr Stevens’ retirement plan comes after a major trading outage in November 2020 triggered an investigation and damning report by the Australian Securities & Investments Commission, which slapped additional licencing conditions on the exchange operator, including appointing an independent expert.

ASIC chairman Joe Longo said he was “very disappointed” ASX went ahead with a software upgrade that was not ready to go live and called for its board and ­management to be personally ­accountable.

Also, it’s just over a year until the ASX’s world-first distributed ledger clearing and settlement software is due to turn on in April 2023 after a series of delays and the departure last year of former deputy CEO Peter Hiom, who was overseeing the project.

In a call with analysts and media, Mr Stevens denied that he was “pulling the plug too early.”

“This is more about is giving people ample notice,” he said.

After nine years at ASX, six of them as CEO, he said: “I don’t see that I’m the person who can commit” to staying with the company from 2023 to 2028, during which time it will be capitalising on its investments including the new version of its Cleaning House Electronic Subregister System, or CHESS, because he had “already done a significant amount of time in the organisation”.

“The thing we should be thinking about is what’s the right thing for ASX over the next 12 to 18 months as we move into CHESS,” he said.

“Is the right thing for me to stay right to the very end of that and through all that testing, then as soon as the flag goes down on the next new strategy at ASX you actually change drivers, or is it actually you want to have a crossover period before, and you hit the ground running when that’s all completed?

“That’s what we thought was the best thing for ASX, as opposed to what’s the best thing for ­Dominic Stevens.”

ASX announced a modest rise in its profit and dividend for the half year to December 31, while bumping up its expenses forecast but leaving its capital expenditure estimate unchanged. Staff costs rose 13 per cent.

For the half year ending December 31, net profit rose 3.5 per cent on the year earlier period to $250.3m. Profit was boosted by record capital raisings, the most new share listings since the first half of 2008 (just before the global financial crisis), the second best half for cash equity market value traded, offset by subdued futures volumes amid low interest rates.

Operating revenue rose 6.6 per cent to $501.4m, generating a 6 per cent rise in half-year earnings before interest and tax to $338.4m. Underlying net profit rose 3.5 per cent to $250.3m. ASX declared an interim dividend of 116.4c per share.

While reporting that capital expenditure was still expected to be $105m-$115m for the year, expenses growth was revised up to 7-8 per cent from 5-7 per cent due to “investment in initiatives coupled with growth in market activity.”

ASX said it continued “to invest in technology to strengthen the quality of our infrastructure and reduce operational risk”, and was “diligently working through a program to address the recommendations related to the ­November 2020 market outage.”

ASX chairman Damian Roche said the replacement of CHESS was progressing well, with an integrated industry test environment open and operating successfully.

He praised the CEO for transforming ASX technology from “ageing to contemporary systems and platforms”, with the age of some of its core equity technologies set to drop from over 20 years to an average of less than five years.

He also credited Mr Stevens with improving ASX’s operating resilience, with incidents falling by 85 per cent over the last five years and only one “severity 1” incident in the last three, compared to 12 in the three years leading up to the start of the transformation program.

Mr Stevens also expanded ASX’s focus on technology, including developing a world-leading position on distributed ledger technology with the CHESS replacement project, and built an “enviable listed capital market for local and global technology companies” and had refreshed its operating model, driving greater accountability and transparency, sharper focus on customers, innovation and growth.”

Egon Zehnder has been commissioned to assist the board in its search for a replacement for Mr Stevens, who said he planned to “retire form executive rolls after leaving ASX”.