Singapore Exchange - DBS Research 2017-01-16: Silver lining in sight

Singapore Exchange - DBS Vickers 2017-01-16: Silver lining in sight SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Silver lining in sight

  • Upgrade to BUY on improved market activity and cyclical upturn in the Singapore economy.
  • Expect earnings growth of 11% in FY18F and a further 8% in FY19F.
  • Target price lifted to S$8.30; dividend yield of 4% is attractive.



Improving market activity; upgrade to BUY. 

  • Market activity for the Securities market improved in 4Q 2016. On a q-o-q basis, turnover value was up 10%, after two quarters of decline. In terms of volume, 4Q 2016 posted a 23% increase. 
  • The Derivatives segment is also stabilising after steep declines in 2Q and 3Q 2016. 
  • In terms of valuation, Singapore Exchange (SGX) is trading at 20x FY18F, which is near the low in recent years, and is also slightly lower than Bursa Malaysia’s 22x and 33x for HK Exchange.


The worst may be over for the Singapore economy. 

  • We are now more positive on the Singapore market as a cyclical upturn may be forthcoming. The bottoming signals have emerged from the uptick in loan growth which bounded back into positive territory after a year of contraction. 
  • Singapore’s manufacturing PMI, in line with the global ones, is also firmly in expansion mode.


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’s microstructure. Boosting liquidity is one of the key priorities. We believe these priorities would lead to an increase in market participants and drive market activity higher. 
  • SGX is also working on the regulatory front to further enhance the corporate governance of SGX.


Valuation

  • Expect earnings growth of 11% in FY18 and 8% in FY19F. We expect earnings to grow by 11% in FY18F after a flat FY17F, and another 8% in FY19F. 
  • Upgrade SGX to BUY with a higher TP of S$8.30, up from S$7.60, based on the dividend discount model, after imputing a slightly lower risk premium and a pick up in market activity for the Securities segment. 
  • Dividend yield is attractive 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/ 2017-01-16
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 8.30 Up 7.600





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