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Whilst the S&P/ASX 200 Index (ASX: XJO) spent all day in the green today before closing 4.4% higher, one ASX 200 stock has been sold off sharply.
ASX Ltd (ASX: ASX) shares took a significant hit, plummeting 8% to $58.14 at the close of trading.
This sharp decline follows the company’s investor forum held on Thursday, where it outlined its financial guidance for FY 2025. Investors appeared less than impressed with some of the projections. Here’s a look.
Why did this ASX 200 stock drop 8%?
At its investor forum, the company revealed that it expected its total expense growth rate to be between 6% and 9% for FY 2025. This comes on top of an anticipated 15% increase in FY 2024.
The primary driver for this cost escalation is ongoing investment in technology, including software licensing, equipment costs, and depreciation and amortisation.
Depreciation and amortisation are said to be ‘non-cash expenses’ in finance, related to business assets. While this is technically true – we don’t physically pay depreciation, for example – they do represent the implied cost of maintaining these assets. The ‘wear and tear’, so to speak.
ASX managing director and CEO Helen Lofthouse provided an update on the company’s five-year strategy, focusing on technology modernisation and regulatory commitments.
“Our five-year strategy builds on a high-quality portfolio of businesses that deliver resilient revenue performance throughout market cycles,” Lofthouse said.
She added that data demand and Australia’s pension system – the fifth largest in the world – were two structural tailwinds behind the ASX 200 stock.
But Lofthouse was less optimistic about the expenditure side. ASX is projecting an “expense growth rate” of 6–9%, which is not something many were expecting. She had this to say:
This growth is primarily driven by ongoing technology related costs related to Horizon One of our five year strategy including software licencing and equipment costs.
Operating expense growth is partially offset by the annualised saving of $11m as a result of the targeted restructure announced at our interim results in February, and the expected further reduction in one-off regulatory costs following the completion of special reports and other activities last year.
It’s also worth noting the ASX 200 stock is making strides with its CHESS replacement project, partnering with Tata Consultancy Services for a product-based solution.
What else did ASX mention?
Other highlights from the investor day include the launch of the first ASX corporate bond, raising $275 million, and exploratory work with the Clean Energy Regulator to develop an Australian Carbon Exchange.
However, these ambitious projects have come at a cost. The company forecasts capital expenditure for FY 2024 to be around $135 million, with FY 2025 technology capital expenditure expected to be between $160 million and $180 million.
These are up from $50 million in the second half of FY 2024. Lofthouse added:
[W]e expect our capex spend to remain elevated through to FY27 to support our technology roadmap, before starting to reduce beyond this period.
We also expect the average depreciation and amortisation schedule of seven to ten years for these major projects, once they go live.
How will this affect ASX shareholders?
The projected expense growth and capital expenditure might have caused concern among investors of this ASX 200 stock today, leading to today’s 8% drop in the share price. Despite this, the company plans to maintain a dividend payout ratio of 80% to 90% of underlying net profit after tax (NPAT).
ASX’s significant investment in technology and regulatory commitments are also crucial for its long-term strategy. Investors would be wise to keep a close eye on how these investments play out over the coming years.