Singapore Exchange Limited - Phillip Securities 2017-04-21: High Costs and Low Top Line Growth May Drag Full Year Results Down

Singapore Exchange Limited - Phillip Securities 2017-04-21: High Costs and Low Top Line Growth May Drag Full Year Results Down SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange Limited - High Costs and Low Top Line Growth May Drag Full Year Results Down


Highlights 

  • 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.


Cost Impact. 

  • 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: 
    1. Seasonally higher expenditure in the 4th quarter. 
    2. Higher staff costs owing to more hires. 
    3. Technology expense is expected to pick in 4QFY07/17 and continue to go up in next few quarters. 
    4. 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.


Investment Actions 

  • 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.




Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2017-04-21
Phillip Securities SGX Stock Analyst Report NEUTRAL Downgrade ACCUMULATE 7.45 Down 7.750



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