ASX underlying profit falls amid ongoing CHESS technology debacle

The market operator has trimmed its dividend and revealed higher operating expenses, amid an ongoing fight over its CHESS program.

ASX Limited chief executive Helen Lofthouse in Sydney. Picture: John Feder/The Australian.

ASX Ltd chief executive Helen Lofthouse has thrown her support behind chairman Damian Roche in the face of calls for his resignation, amid allegations the exchange made misleading statements about its CHESS technology upgrade.

The Australian Securities & Investments Commission started landmark Federal Court proceedings against ASX this week, heaping pressure on the company and sparking calls for Mr Roche to step down.

Asked whether the chairman could continue in his role, Ms Lofthouse stressed that ASIC’s legal action wasn’t targeted at individual board members or executives and that the proceedings were “very recent”. “It is worth noting they’re against ASX Limited and … we can’t speculate at this point on the outcome,” she said in an interview.

“In respect of Damian (Roche), I guess I’d just comment he was obviously re-elected at the AGM. He’s made it very clear it’s his last term as chair and he’s been very focused on board renewal as well as an orderly chair transition, and you’ve already seen some of that in action.”

In a damning statement on Wednesday, ASIC said there was a “collective failure” by the ASX board and senior executives in February 2022 when ASX told investors its CHESS clearing and settlement system replacement project remained “on-track for go-live” in April 2023 and was “progressing well”.

“ASIC alleges those representations were misleading and deceptive because, at the time of the announcements, the project was not tracking to plan and ASX did not have any reasonable basis to imply the project was on track to meet future milestones,” the corporate regulator said.

ASX chairman Damian Roche and CEO Helen Lofthouse.

It’s understood that if the legal case is successful the maximum penalty is $555m.

The Federal Court will need to determine the merits of the case and whether breaches of the ASIC Act occurred. A legal and commercial settlement is also possible.

S&P Global Ratings said ASX had “room to absorb some financial pressures”.

“The ASX’s dominant market position should afford it room to absorb some financial pressures from potential fines and penalties resulting from an ongoing regulatory investigation,” the international ratings agency said in a report.

“The ASX should maintain robust financial metrics on the back of its strong business profile.

“Consequently, the company has capacity to withstand some financial hits in our view. The company’s annual results announced today support this.”

Ms Lofthouse wouldn’t comment on legal options the ASX was considering and said the size of any penalty would “be just speculation at this point”.

“There’s really not a lot I can say, given that it’s subject to a court process,” she added.

“We absolutely recognise the significance and the serious nature of the proceedings, but at this stage, we now need to take the time to review and consider the allegations carefully, and that’s what we’re doing,” she said. “We just need to take the time to properly review and consider.”

The Australian Shareholders Association has called for a review of ASX’s governance processes and on Friday demanded that Mr Roche specify when he would step down. ASA chief Rachel Waterhouse signalled further potential voting action against the ASX at the market operator’s AGM.

“ASA has voted against director elections at the past couple of AGMs,” she said.

Her comments came as ASX reported a 3.4 per cent fall in underlying net profit after tax to $474.2m for the year ended June 30, driven by higher operating expenses, partially offset by operating revenue growth and increase in net interest income.

The statutory result was a 49.4 per cent jump due to the CHESS replacement project derecognition charge in the prior corresponding period.

The underlying result was a slight miss on Bloomberg’s consensus estimate of $479.8m. Operating expense rose 16 per cent to $392.5m, while operating revenue rose 2.4 per cent to a record $1.03bn.

ASX shares rose 0.1 per cent at $64.06 on Friday while the S&P/ASX 200 rose 1.3 per cent.

ASX dipped to a one-week low of $61.89 after its results.

Citi analyst Nigel Pittaway said ASX faced uncertainty over the lawsuit which “will likely continue to overhang the stock” and “the amount of possible penalty (was) currently undetermined.”

Asked about the level of angst that repeated delays to the initial CHESS replacement project caused ASX investors and market participants, Ms Lofthouse said her focus had been on “making sure that we have really good, strong engagement with all of that range of stakeholders”.

“As you know, we announced in November the appointment of TCS as our product partner there,” she said. “We think that’s absolutely the best solution for the Australian market.... that stakeholder engagement and making sure we’re really working in strong partnership with the market towards the right outcome for everyone, that absolutely is the focus.”

Last year, the ASX drafted in Indian giant TATA Consultancy Services to design and rebuild the bourse’s underlying technology as it pushed ahead with a new iteration of the CHESS replacement project.

Citi’s Mr Pittaway said the slightly weaker than expected underlying profit announced by ASX was due to “slight softness in securities and payments revenue mainly caused by weaker issuer services revenue which seems to have been hurt by the lack of IPO activity”.

He noted the result was in line with his profit expectations, although reflected a “slight miss” in underlying net profit. Mr Pittaway also highlighted

“the lack of CHESS replacement related compensation” in the ASX’s results.

The ASX’s latest CHESS upgrade is tied to payments for industry participants including a rebate sum of up to $15m, which has been paid to clearing and settlement participants. There is an additional pot of up to $55m – known as the development incentive pool – of which about $17.8m has been paid, up slightly from $16.8m at December 31.

Ms Lofthouse reiterated guidance for financial 2025 cost growth of 6-9 per cent. Financial 2024 costs rose 14.7 per cent.

But the full-year dividend was trimmed to $2.08 per share, versus $2.10 per share expected by analysts. Still, the dividend was within a target payout ratio range of between 80-90 per cent. The ASX intends to maintain this payout range for the medium term.

Capital expenditure guidance for the 2025 financial year was maintained at $160m to $180m. ASX reiterated it would remain at that level until fiscal 2027.