Morningstar | ASX Special Dividend Likely Following Sale of IRESS Stake
We expect wide-moat-rated ASX to use the AUD 385 million raised from the sale of its 18.6% stake in IRESS to pay a fully franked special dividend. This may enable franking credits to be distributed ahead of a potential change in legislation, should the Labor Party win the next federal election, which is likely to be held in May. However, the company has yet to clarify the intended use of the funds. Considering the strength of ASX’s balance sheet and cash flow generation, we don’t think the company either needs the funds nor do we expect the funds to be used for merger and acquisition activity. We make no change to our AUD 52 fair value estimate and continue to believe the shares are overvalued.We estimate the sale proceeds would fund an ASX special dividend worth about AUD 2.00 per share or AUD 2.84 including franking credits. This would require AUD 163 million in franking credits, and ASX had AUD 268 million in franking credits as at June 30, 2018; this figure has been gradually increasing each year. The special dividend would be 2.90% of the AUD 68.91 current share price, or 4.12% including franking credits. We don’t expect to change our AUD 52 fair value estimate following the sale of the IRESS stake, which constitutes less than 3% of ASX's market capitalisation.
From IRESS’ perspective, the sale has no impact. ASX has reportedly sold its stake to long-term institutional investment funds, which reduces the likelihood of an acquisition of IRESS. ASX bought into IRESS at its initial public offering in 2000 when both businesses were focussed on listed equities. However, the two companies’ strategies have since drifted apart, and it makes sense for ASX to sell its stake. We expect IRESS’ share price strength was the catalyst for the sale. We make no change to our IRESS AUD 11.80 fair value estimate and at AUD 12.26 consider the shares to be fairly valued.
ASX is a multi-asset class and exchange group. Co.'s principal activities are: providing securities exchange and ancillary services; derivatives exchange and ancillary services; central counterparty clearing services; and registry, depository, settlement and delivery-versus-payment clearing of financial products. Co. services companies and other issuers that list equity and debt securities on the exchange, as well as retail and institutional investors that invest in and trade those securities. While its operations are primarily based in Australia, Co. services both domestic and international customers, and some of its services are accessible from offshores.
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