ASX warns on rising costs amid spending on technology, risk management as profit rises

The stock exchange operator posts a 5.7 per cent rise in annual profit, but warns costs are set to jump amid spending on staff, technology and troubled CHESS project.

ASX expects costs to jump in the coming year as it battles inflationary impacts on its business and pumps millions more into its long-delayed clearing and settlements replacement project.

The market operator on Thursday also flagged ongoing volatility in listed markets and said it was cautious on the outlook for initial public offerings in the year ahead, as it handed down a 5.7 per cent rise in profit for the 2022 financial year, driven by decade-high levels of listings and elevated trading activity.

New chief executive Helen Lofthouse provided little reassurance on the troubled CHESS replacement project, now years behind schedule, telling analysts she would wait for the outcome of an independent review of the work done to date before commenting on the outlook for the project or any completion date.

Asked if ASX had a ‘plan B’, Ms Lofthouse simply said that while the current CHESS settlement platform was working well, it needed to be replaced.

“We will absolutely be replacing it. This review is really just working through some of the details and the challenges we’re having with the project at the moment,” she said.

The market operator has so far spent $216m on the project that aims to introduce blockchain technology into the ASX’s critical clearing and settlement operations.

“We have identified that more development is needed in parts of the application software to meet the market’s scalability and resilience requirements for new CHESS,” Ms Lofthouse said.

“I am disappointed that we have extended the timeline for go-live for a third time, and I know that our customers are disappointed too. But we all agree that new CHESS must be implemented safely and with the functionality to serve the market’s needs.”

Shareholders, spooked by the anticipated jump in spending, sent the shares down 2.4 per cent to $82.59 in afternoon trade.

Ms Lofthouse, who stepped into the top job this month, also warned that costs would rise at a greater pace this year, as she detailed more muted trading activity in the first weeks of fiscal 2023.

“July 2022 activity was mixed, with both cash market and futures market volumes down compared to last July,” she said.

“It was a holiday period for many in the Australian market, now that Covid restrictions have lifted, so we will see in coming months whether that was a significant influence.”

In terms of market outlook, the prospects for IPO activity remained uncertain, she cautioned.

“We expect continued volatility (in markets). This can be a positive for a number of ASX’s markets, supporting our customers in their risk management,” Ms Lofthouse added.

“Inflation and a rising interest rate environment are already driving growth in activity at the short-end of the interest rate futures market and OTC clearing, and is also starting to benefit our net interest income.”

New ASX CEO Helen Lofthouse has warned that costs would rise at a greater pace this year.

But higher inflation would drive up costs this year, she warned, jumping from the 7.5 per cent rise in 2022, to $333.5m, to a much higher 10-12 per cent lift in the year ahead.

“That’s driven by both the inflationary impacts that many companies are experiencing, and also our continued investments in various areas including technology and risk management.”

Capital expenditure, meanwhile, most of which will go to the CHESS replacement project, is forecast to rise to between $115m and $125m. That is a 15 per cent rise in capex at the midpoint.

For the 12 months through June 30, ASX net profit rose to $508.5m, up $27.6m on the prior year, while revenue jumped 7.5 per cent to $1.02bn.

The impact of the lower interest rate environment on futures volumes detracted from its performance, the company said.

“ASX continues to benefit from its diversified business model,” Ms Lofthouse said of the result.

“We saw decade-high levels of listings activity, particularly in the first half, with 217 new listings in the period – the highest number since 2008.

“And the total amount of capital raised increased 56 per cent to $159.4bn (excluding the BHP capital unification), a new record overall.”

The markets business benefited from higher equity trading activity and demand for commodities products, with this partly offset by future volumes, she added.

“Onmarket equity trading increased, with a daily average value across the period of $6.7bn, up 15 per cent. The increase in market activity also supported revenue growth in our Securities and Payments business.”

Earnings per share and dividends both increased 5.7 per cent, in line with net profit through 2022, while total dividends rose to 236.4c a share, fully franked, maintaining ASX’s 90 per cent dividend payout policy.