Tuesday, UBS updated its stock price target for ASX Limited (ASX:AU) (OTC: ASXFY), increasing it to AUD64.15 from the previous AUD57.00, while keeping a Sell rating on the shares. The adjustment comes after ASX Limited disclosed expected costs for the second release of its CHESS replacement project, which is set to provide cash equity settlement and sub-registry services by the fiscal year 2029.
ASX Limited, which announced its revised plans for the CHESS replacement more than a year ago, is expected to incur approximately AUD420 million in expenses for the new system. This follows a substantial AUD250 million write-down of its initial distributed ledger technology solution in the first half of 2023. The first release of the project, focusing on cash equity clearing, is scheduled for the fiscal year 2026.
The firm's capital expenditure is anticipated to stay high until the fiscal year 2028, with depreciation and amortization costs projected to nearly triple by the fiscal year 2029 once the CHESS replacement is operational. This financial outlook suggests a compound annual growth rate (CAGR) for ASX's earnings per share (EPS) of around 4% from the fiscal year 2025 to 2029, according to UBS estimates.
The financial services company's forthcoming investments in the CHESS replacement solution and the subsequent financial projections are factors that have led UBS to maintain its Sell rating. The anticipated elevated costs and the impact on the company's earnings growth are seen as limiting the potential upside in the value of ASX Limited's shares.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on ASX Limited's financial position and market performance. The company's market capitalization stands at $8.32 billion, with a P/E ratio of 27.05. This valuation metric aligns with the UBS analysis, which suggests limited upside potential for the stock.
An InvestingPro Tip indicates that ASX Limited is trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.57. This could be seen as a counterpoint to UBS's Sell rating, suggesting that the stock might be undervalued based on its growth prospects.
Despite the anticipated high capital expenditure for the CHESS replacement project, ASX Limited has maintained a strong financial position. The company boasts an impressive gross profit margin of 96.24% for the last twelve months, indicating efficient operations. Moreover, ASX Limited has maintained dividend payments for 26 consecutive years, demonstrating a commitment to shareholder returns even as it invests in significant infrastructure upgrades.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips for ASX Limited, providing a deeper understanding of the company's financial health and market position.
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