Morningstar has lifted its capital allocation rating for the Australian Securities Exchange from poor to standard on the basis of its strong balance sheet, leadership reset and its wide economic moat.
In its full-year results for 2025, the ASX reported that underlying net profit after tax had increased 8 per cent.
However, the exchange has continued to see abnormal growth in operating expenses and capital expenditures as it invests heavily to protect its social and regulatory licence.
Operating expenses excluding regulatory costs grew 5 per cent on the prior year despite employee expenses remaining flat.
“The increase was driven mostly by technology expenses rising by more than a third,” Morningstar said.
“Capital expenditure was also up nearly a third as the replacement project for the Clearing House Electronic Sub-register System ramps up.”
Morningstar equity analyst Roy Van Keulen said he expects that costs will start to normalise from fiscal year 2027 and that the exchange will return to normal mid-60 per cent EBITDA margins by fiscal 2028.
The research firm considers the fair value estimate for the ASX to be $77 per share and shares to be materially undervalued at the moment.
“The market is struggling to see the light at the end of the tunnel after the exchange’s various issues in recent years,” it said.
Morningstar said its decision to lift its rating for the ASX reflects a series of strong leadership decisions over the past few years by chief executive Helen Lofthouse who took over leadership of the exchange after it ran into difficulties with the CHESS replacement project.
Van Keulen noted that the ASX had faced various setbacks in recent years, including an employee recently mistaking a news item on private equity firm TPG as relating to the TPG telecommunications company, which resulted in trades in TPG having to be cancelled.
Following the widely publicised and criticised botched CHESS replacement project, Van Keulen said these types of errors had received more scrutiny than they otherwise would.
“Unfortunately, such errors are a natural part of any company that employs humans and works with computers. For example, last year, the New York Stock Exchange experienced a glitch that saw shares in Berkshire Hathaway drop by over 99 per cent,” he said.
“We believe our capital allocation rating should not relate to how many setbacks a company faces that are effectively beyond its control, but rather to how a company chooses to allocate its resources.”
Morningstar said its assessment of the ASX is that the current chief executive had made a long series of correct decisions, which meant it no longer felt it was appropriate to maintain its prior poor rating.
“These decisions started with an explicit focus on protecting the company’s long-term social and ultimately regulatory licenses through heavy investment at the expense of short-term profits,” it said.
Additional leadership overhauls and cultural resets have also convinced the research house that the ASX is making the right decisions to protect its regulatory moats.
“This is not to say that these investments and efforts will be enough. There is a risk that regulatory exclusivity may be reduced. However, we view ASX as a natural monopoly, even if regulations around listings were to allow for more competition,” Van Keulen said.
“Companies today choose to list on ASX, despite having the option to list on NSX, overseas exchanges, or to attract capital from private capital. We don’t expect regulatory changes to materially affect the exchange.”
Morningstar also expects volatility to increase the relative attractiveness of exchange businesses like the ASX due to the increased trading and clearing volumes.
It also expects the energy transition will act as a tailwind to ASX’s listing business, as Australia is the leading exporter of many of the natural resources required to build out the renewable energy infrastructure, it said.
