Dividend hit as ASX expenses rise following several CHESS upgrade delays

Shares in the market operator plunged more than 12 per cent to their lowest point since 2019, amid a disappointing strategic outlook.

ASX Limited shares plunged more than 12 per cent to a 4.5-year low after the exchange operator cut its dividend payout as part of a new five-year strategy that sharply disappointed investors.

The group has cut its dividend payout policy to 80-90 per cent of underlying net profit after tax from its current policy of a 90 per cent payout ratio.

The market was also underwhelmed by its technological outlook, following several delays of the replacement of its ageing CHESS computer system.

The ASX’s five-year strategy will address “situational challenges” including the need to meet regulatory commitments which require a replacement of its CHESS computer system, said the company, which is holding its first investor day on Tuesday.

Expenses are expected to come in at the top end of the group’s annual guidance of 10-12 per cent, before rising to 12-15 per cent in the 2024 financial year.

ASX said the rise in fiscal 2023 expenses has been driven by CHESS related regulatory and assurance costs and CHESS replacement solution design. The expense increase in fiscal 2024 is needed to “support the ‘reset’ horizon of the five-year strategy and ongoing regulatory and technology modernisation costs.” A reduction in the expense growth rate is expected in the 2025 financial year

Capital expenditure guidance for the 2023 financial year has been cut further to $95m. It slashed its annual capital expenditure guidance to $100-$115m in February, reflecting a pause in the CHESS replacement project.

But in the 2024 financial year, it is expected to see capital expenditure lift to between $110m to $140m, implying a potential 16-47 per cent rise.

ASX said the capital expenditure lift in the 2024 financial year is needed to support “technology modernisation, and regulatory and risk plans through delivery capability and program governance uplift work.”

A corporate bond with a value likely in the range of $200m to $300m, subject to market conditions and board approval and will launch in the first half of the 2024 financial year.

ASX also forecast a medium-term target for underlying return on equity of 13-14.5 per cent.

“We recognise there are near term, situational challenges that we must address, including our regulatory commitments and our expanded technology modernisation program,” ASX chief executive Helen Lofthouse said.

“With a strong balance sheet, leading positions in key markets and structural tailwinds, ASX has an attractive core business and we must continue to invest in order to grow and to support the financial markets effectively.”

ASX released a report for ASIC this week on the exchange provider’s arrangements for the support and maintenance of CHESS to ensure it remains operationally reliable until a replacement solution is implemented.

The report includes 27 initiatives relating to capacity, availability, performance, and IT management as well as security and continuity that ASX says will be important in ensuring the ongoing operation of current CHESS.

Ms Lofthouse said ASX is “making good progress on the CHESS replacement solution design and our intention remains to announce the solution design by the final quarter of this calendar year.”

Meanwhile, ASIC said its probe of ASX over its CHESS replacement program is “ongoing”.

ASX shares were down 10 per cent to $60.72 late Tuesday afternoon after earlier in the morning dropping to $59.16, their lowest point since January 2019.