Weak derivatives, one-off costs
- SGX’s 4QFY6/15 net profit (S$96.2m) was below our expectation due to a lack in the pickup of derivatives fees and presence of one-off costs, though it was in-line with consensus estimates.
- Full-year profit was 98%/99% of our/consensus forecasts.
- We were expecting 4Q earnings to lift-off 16% qoq, on the back of record-high traded volumes of the China A50 index futures (+79% qoq); but, 4Q earnings was only +9% qoq as tighter clearing rates meant derivatives fees were only +8% qoq.
- Add some one-off cost items and results came in short.
- Our forecast is unchanged. Our DDM-based target price slips marginally to S$7.98.
- The results show that SGX’s A50 exposure does not necessarily flow through to earnings, and as the A-share market recedes, another catalyst for underperformance could emerge.
- Maintain Reduce.
Derivatives drive sequential revenue growth, but overhyped
- SGX’s 4QFY15 revenue of S$216m (+8% qoq) failed to live up to the hope that had been stoked up by the dramatic pick-up seen in the China A50 contract volumes this quarter.
- 4Q derivative revenue only grew 8% qoq, disappointing considering that total derivative volume rose 36% qoq, on a big jump in China A50 and iron ore contract volumes.
- Securities ADVT grew incrementally in 4Q (+6% yoy, +2% qoq to S$1.2bn), but again, securities clearing fees (+4.5% yoy) were also muted by the change in clearing fee structure.
- With all the other revenue line items fairly flat, the inability of derivative fees to inflate as expected caused the topline disappointment vs. our expectations.
- The derivative disappointment was compensated by outperformance in stable fee streams such as depository services and listing fees, but it was not enough.
Costs were higher-than-expected, albeit on one-off items
- Other than weaker-than-expected derivatives clearing fees, the other negative was costs.
- Overall, FY15 costs landed in at S$376.7m, some S$7m ahead of its prior cost guidance (S$360m-370m).
- 4Q saw some ~S$7m of one-off costs incurred, related to the trading disruption and shares vesting of the ex-CEO.
Maintain Reduce
- Although SGX’s share price has come off since Apr, it is not yet enough for us to turn positive.
- The one-off costs should not bother investors.
- Our bigger grouse is:
- the smaller beta of derivative fees to the volumes ramp-up, as seen in 4Q, and
- slightly lower-than-expected DPS as dividend payout ease down to 86%.
(Kenneth NG, CFA; Jessalynn CHEN)
Source: http://research.itradecimb.com/
