Singapore Exchange - DBS Research 2017-07-31: Positive View Intact

Singapore Exchange - DBS Vickers 2017-07-31: Positive View Intact SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Positive View Intact

  • SGX's FY2017 net profit of S$339.7m was 6% below expectations, mainly due to Derivatives.
  • Derivatives revenue declined 7% y-o-y; average fee per contract was stable.
  • Revenue for Securities flat; daily average traded value increased 2% to S$1.12 bn.
  • FY18F-FY19F earnings cut by 9% - 11%; TP reduced to S$8.20.



Maintain BUY; TP reduced slightly to S$8.20. 

  • We maintain our positive view on the Singapore market and expect Singapore Exchange (SGX)’s earnings to grow by 5%-7% going forward, after a relatively weak FY 2017. 
  • We believe that SGX’s continued efforts to drive market liquidity should bear fruit in the coming years. 
  • In terms of valuation, SGX is trading at 22x FY18F PE, which is close to -1SD and is also close to the low in recent years. 
  • SGX is also trading at a cheaper PE valuation to Bursa Malaysia’s 25x and 39x for HK Exchange.


WHAT’S NEW


FY2017 net profit of S$339.7m was 6% below expectations, mainly due to Derivatives. 

  • SGX reported net profit of S$339.7m (-2.7% y-o-y), on revenue of S$800.8m (-2.1%). Excluding a one-off loss of S$4m from the disposal of its investment in the Bombay Stock Exchange and one-off acquisition cost of S$3.7m for the Baltic Exchange, core net profit for FY2017 would be S$347.4m (-0.5%). 
  • Operating and net profit margins were maintained at 50% and 42% respectively, same as FY2016. 
  • A final DPS of 13Scts was declared, unchanged from the previous year. Total DPS for FY2017 amounted to 28Scts, and represents an 88% payout.
  • On a quarterly basis, 4Q net profit came in at S$85.2m (+11% y-o-y; +3% q-o-q), while revenue of S$207.7m (+5% y-o-y; +2% q-o-q) was the highest in the last five quarters.

Derivatives revenue declined 7% y-o-y to S$303.1m, contributing 38% of total revenue, vs 40% a year ago.

  • Market volumes were lower but average fee per contract was stable at S$1.18 (S$1.19) due to a change in mix of derivatives contracts.
  • Revenue for Securities were flat; daily average traded value (SDAV) increased 2% to S$1.12 bn. Contribution from this segment accounted for 26% of total revenue in FY2017, up from 25% in FY2016. Turnover velocity for the year was 39%, vs 41% in the previous year.

Fixed income stable. 

  • Overall, this segment registered a 2% increase in revenue. 
  • Post Trade Services revenue fell 2% to S$115.7m, mainly due to lower contract processing revenue as brokers progressively migrated to their own back office systems. But Market Data and Connectivity saw a 7% increase in revenue to S$93.2m due to strong demand for colocation services. 
  • Revenue for Issuer Services increased by 2% to S$83.8m.

Expenses declined by 2% to S$399.0m, below guidance, primarily due to lower processing and royalty fees and technology expenses. 

  • For FY2018, operating expenses are expected to be between S$425m and S$435m, and technology-related capital expenditure to be between S$60m and S$65m.


Where we differ: We are more positive on the Singapore market as a cyclical upturn may be imminent.

  • We believe that the worst could be over for the Singapore economy. Some signals that the economy has bottomed have emerged such as the uptick in loan growth which rebounded back into positive territory after a year of contraction, and Singapore’s manufacturing PMI is also in expansion mode, in line with the global ones.


Potential Catalysts: 

  • Potential structural changes to boost liquidity in the Securities market, diversifying business mix to reduce reliance on Derivatives, earnings accretive M&A.


Valuation


FY18F-FY19F earnings cut by 9% - 11%. 

  • We have revised down our earnings forecast to account for the lower volatility for the Derivatives segment. We have cut earnings for FY18F and FY19F by 9% and 11% respectively. 
  • Our target price, based on the dividend discount model, is reduced slightly to S$8.20 from S$8.30 previously, after accounting for the cut in earnings, partly offset by the shift in valuation base to FY18.
  • Our TP implies a PE of 24x on FY18 earnings. Maintain BUY.


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.




Lee Keng LING DBS Vickers | Sue Lin LIM DBS Vickers | http://www.dbsvickers.com/ 2017-07-31
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 8.200 Down 8.300



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