Singapore Exchange - DBS Research 2016-10-20: Outlook remains challenging

Singapore Exchange - DBS Research 2016-10-20: Outlook remains challenging SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Outlook remains challenging

  • 1Q17 results below expectations; both Securities and Derivatives reported lower revenue.
  • Cut FY17F by 9% and FY18F earnings by 11%.
  • Maintain HOLD; TP reduced to S$7.60.



Outlook remains challenging. 

  • We continue to see challenges persisting in both the Securities market, and the Derivatives business. Derivatives will be the main growth driver until SGX is able to monetise initiatives that it has put in place to improve the market microstructure. 
  • Cost management will be one of the key factors to boost bottomline. 
  • Though valuations on forward PE and P/BV basis are currently below average, we maintain our HOLD call; TP reduced to S$7.60, on the challenging outlook.


1Q17 results below expectations; both Securities and Derivatives reported lower revenue. 

  • The lower level of market activities following recent economic and political uncertainties led to a 13% y-o-y drop in 1Q17 revenue to S$190.8m, while net profit suffered a 16% fall to S$83m. 
  • Both revenue and net profit accounted for 22% of our FY17F forecasts, below expectations. DPS of 5Scts was declared for the quarter.


Boosting liquidity in the Securities market a major focus; derivatives is still the front-runner for growth. 

  • Derivatives will continue to be the main growth driver until SGX is able to monetise initiatives to improve the Securities market microstructure. 
  • We believe the results of these priorities would only be visible in the medium to long term. SGX is also working on the regulatory front to further enhance the corporate governance of SGX.


M&A to diversify revenue streams and boost earnings. 

  • The proposed acquisition of The Baltic Exchange for £77.6m (S$137m) cash is expected to be completed by the end of November 2016. Upon completion, this would boost SGX’s plans to diversify revenue streams from the sluggish Securities market and reduce reliance on the Derivatives market.

Valuation

  • We cut earnings for FY17F by 9%, after imputing a lower average fee per derivative contract. 
  • For FY18F, we have lowered both the Derivatives and Securities forecasts in view of the challenging outlook. 
  • Maintain HOLD call on SGX with a reduced TP of S$7.60, down from S$7.80, based on the dividend discount model. 
  • Dividend yield is decent at about 4% for FY17F.

Key Risks to Our View

  • Market activity. Slower-than-expected market activity could derail revenue traction. 
  • Derivatives, a growing revenue generator, could be at risk if products do not generate sufficient trading volumes.




LING Lee Keng DBS Vickers | Sue Lin Lim DBS Vickers | http://www.dbsvickers.com/ 2016-10-20
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 7.60 Down 7.800



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