A key objective for Contango Income Generator (ASX:CIE) is to deliver an attractive and sustainable income stream by investing in mid-cap companies with defensive business models and predictable earnings growth.
This month’s mid-monthly update focuses on a defensive growth stock in the CIE portfolio with stable earnings and a long history of profitability. The stock has outperformed the S&P/ASX200 by 24% year-to-date.
Stock in Focus: ASX Limited
ASX Limited (ASX:ASX) operates an integrated exchange that facilitates markets for a wide range of asset classes including equities, fixed income, commodities and energy.
The group provides a diverse range of market services which provide the infrastructure Australia needs to create a globally competitive capital market and a vibrant, robust economy. This includes listings, trading, clearing, settlement, technical and information services and other post-trade services.
Additionally, ASX oversees compliance with its operating rules, promotes standards of corporate governance among Australia’s listed companies and helps to educate retail investors.
ASX is one of the world’s top-10 listed exchange groups as measured by market capitalisation, and the largest interest rate derivatives market in Asia.
In simple terms, just like roads facilitate transportation for a city, ASX manages the infrastructure that facilitates Australia’s financial markets.
ASX is one of the few monopoly-style business listed in Australia. With little competition, it is the significant market leader in its industry. The company benefits from the structural digitisation of the financial services sector, has a long history of profitability, strong management, and has invested heavily in technology to maintain its position as the dominant Australian bourse.
ASX has used its market position to drive innovation, as well as build shareholder wealth as demonstrated by the dividend profile below:
Statutory Earnings per Share (EPS) (Cents)
Dividends Earnings per Share (EPS) (Cents)
Source: ASX Annual Report 2019
ASX facilitates and tracks various types of financial transactions across different asset classes. One of the more commonly known parts of the ASX business is the Clearing House Electronic Subregister System – or CHESS.
CHESS is one example of a defensive income initiative that sits within ASX’s portfolio of earnings streams. Without getting bogged down with financial jargon, ASX’s divisions are generally monopolies that are regulated to provide a safe and efficient transaction medium for all participants. These businesses are also heavily embedded into their customers’ businesses, and any change to this model requires the whole industry to move. This makes competition virtually impossible thereby securing ASX’s future earnings streams.
A general criticism of monopolies is that they become too ‘fat and lazy’ to innovate with technology. ASX seems to be an exception to this rule, having undertaken a variety of technological advancements; most notably the current project of introducing distributed ledger technology (DLT) to replace the aging CHESS system.
Although this may not sound very exciting initially, DLT uses the same technology that underpins cryptocurrencies or, the most popular type of digital ‘coin’, Bitcoin. To be perfectly clear, ASX isn’t about to launch a digital Australian Dollar coin or any derivative of this. It is simply using the underlying technology also used by cryptocurrencies to improve its older technology and systems. DLT will make these systems more efficient, standardising data for multiple parties and lowering costs which should grow its addressable market and increase future earnings for shareholders. ASX is one of the first exchanges in the world to begin implementing blockchain technology and its global peers have taken notice, with a number of international exchanges such as Nasdaq, Japan Exchange Group and Deutsche Börse also announcing DLT solutions.
ASX’s current and future strategy is not just about replacing CHESS or the futures trading system. The business is transforming its entire technology stack from the operational databases and communications infrastructure, to the way it deploys ledger, cloud, big data and AI tools. ASX has a long history of being at the forefront of the global exchange industry in the adaptation of technology for the benefit of customers, investors and regulators.
Recent Performance and Where it Fits in the Portfolio
Defensive companies play a key role in maintain and growing CIE’s capital value over the long term. We like to hold businesses that will continue to deliver even in volatile market conditions. ASX has focused on building ‘an exchange for the future’ – an exchange that provides resilient and trusted infrastructure and services, delivers innovative solutions and reduces cost and risk for its customers and across the Australian economy.
ASX’s earnings stream has performed consistently despite volatile markets, driven by increased trading activity across various asset classes. The investment team has added to ASX throughout the recent market volatility to increase the defensive nature of the CIE portfolio. As at 30 April 2020, ASX Ltd was the 5th largest position in the CIE portfolio with a weighting of 2.8%. We expect ASX to continue to deliver into the medium term and it remains a core holding in the portfolio.