The ASX Ltd (ASX: ASX) is the company that owns and operates the Australian Stock Exchange, as well as the Futures Exchange.
The company has four primary businesses, Listings and Issuer Services, Trading Services, Equity Post-Trade Services, Derivatives and OTC Markets. Somewhat surprisingly, Derivatives and OTC Markets generates the highest proportion of revenue as the table below shows.
| Revenues ($m) | Division |
| 192.7 | Listings and Issuer Services (124 IPOs, secondary capital raisings) |
| 182.8 | trading Services (cash trading, information services, technical services) |
| 102.0 | Equity Post-Trade Services (clearing & settlement) |
| 265.8 | Derivatives and OTC markets (Futures, options, Austraclear) |
| 73.1 | Interest & dividend income (collateral balances & IRESS) |
Source: Company reports
Margins are huge, with net profit after tax coming in at around 52% of revenues – which is a consistent theme. If you think about it, that makes sense. The ASX trading platforms and systems are in place, and after the initial investment required very little incremental maintenance. All the while the company is seeing higher trading levels, more companies coming to market, more capital raisings and activity, which cost little extra to add to the systems already in place.
That may change in the next couple of years, with the ASX highlighting the need to spend more capital expenditure on a new trading platform, a replacement for the CHESS system and introducing block chain (distributed ledger) technology. That represents a risk in several forms, including higher expenses and lower profits and earnings, and the risk of outages.
As well as the exchange and market operations, the ASX also owns 19.1% of software company Iress Ltd (ASX: IRE). Iress provides brokers, fund managers and investors with software to access a number of stock markets around the world including Australia. The company has also moved into wealth management and financial planning software.
Despite the arrival of competitor Chi-X and losing more than 10% market share of cash equities trading, it's clear the ASX has a dominant almost-monopoly business.
At the current price of $47.78, the shares are paying a trailing dividend yield of 4.1% and trading on a P/E of 21.7x. That's not exactly a bargain-basement price.
Foolish takeaway
The risks may be rising for shareholders in ASX with the technological changes coming and potential to disrupt business-as-normal. Today's price doesn't offer any margin of safety should the ASX experience outages or technology issues with the new systems.
