Singapore Exchange Limited - High Costs and Low Top Line Growth May Drag Full Year Results Down
- Excluding one-off loss of S$4.0mn from the disposal of shares of the Bombay Stock Exchange, 3QFY06/17 PATMI would have decreased 2% y-o-y to S$87mn in line with our expectations of S$83mn.
- Operating expenses decreased because of lower Processing and Royalties expense and lower Professional fees.
- Total revenue was lower because of weaker y-o-y Derivatives Trading Volume.
- Interim dividend of 5 cents per share proposed.
- Downgrade “Neutral” with lower TP of S$7.45 (vs. previous TP of S$7.75).
Equities and Fixed Income business boosted by higher SDAV and bond listings.
- Securities Trading and Clearing revenue increased 1.0% year-on-year (y-o-y) as Securities Daily Average Volume (SDAV) improved 1.6% y-o-y to S$1.24bn. The higher SDAV was due to the continued positive momentum post US Presidential Election.
- Issuer Services revenue increased 2.0% supported by 189 bond listings compared to 78 bond listings in 3QFY06/16.
Equity and Commodities derivatives revenue decreased 12.7% y-o-y.
- Total volumes decreased 18% y-o-y to 39.9mn contracts but average fee per contract increased to S$1.20 compared to S$1.15 a year ago due to change in mix of Derivatives contracts.
- Volume decreases were led by SGX China A50 Index futures (-30% y-o-y), Japan Nikkei 225 index futures (-36% y-o-y) and SGX Nifty 50 Index futures (-9% y-o-y). The fall in volumes in key Equity Derivatives was a result of lower hedging activities by market participants at the beginning of 2017 as markets were less uncertain and less volatile compared to the same period in 2016.
- Despite weaker volume, SGX China A50 Index futures and SGX Nifty 50 Index futures improved market share from 32% to 34% y-o-y and 40% to 48% y-o-y respectively.
- But Japan Nikkei 225 index futures saw a decline of market share from 17% to 16% y-o-y.
- Processing and Royalties expenses decreased 31% y-o-y due to lower Derivatives volumes. Professional fees decreased 75% y-o-y due to one-off fees for the acquisition of Baltic Exchange a year ago.
- We expect 4QFY06/17e operating expenses to be at least S$114mn because of:
- Seasonally higher expenditure in the 4th quarter.
- Higher staff costs owing to more hires.
- Technology expense is expected to pick in 4QFY07/17 and continue to go up in next few quarters.
- Higher Processing and Royalties costs as Derivatives volumes pick up.
- Management’s FY17e guidance for operating expenses is on the lower end of the S$405mn to S$415mn range, unchanged from previous quarter.
- We expect 4QFY06/17e PATMI to be between S$90mn to S$95mn and we revise our FY17e PATMI to S$333mn from previous estimate of S$347mn.
- Downgrade “Neutral” with lower TP of S$7.45 (vs. previous TP of S$7.75) because inasmuch as we expect higher manpower costs and technology expenses in a seasonally higher operating costs environment in the 4-th quarter, we do not see any near term catalysts to boost top line to positively offset the higher costs.