DBS Group Research 2015-07-30: SGX - Derivatives driving growth. Maintain HOLD.

Derivatives driving growth 


  • 4Q/FYJun15 earnings were in line; derivatives continued to drive growth; securities market lagged; 16 Scts final DPS declared (full year DPS at 28 Scts). 
  • Base DPS raised to 5 Scts per quarter (from 4 Scts) in FY16; dividend policy revised to a minimum of 80% or 20 Scts (from 16 Scts), whichever is higher. 
  • Securities market remains challenging until further structural enhancements materialise; derivatives will remain the key driver. 
  • Maintain HOLD, TP S$7.80.  

Highlights 


Derivatives continues to drive growth; higher expenses. 

  • Strong derivatives revenues in 4Q15 led to a 42% y-o-y surge in FY15 derivatives revenues, mainly driven by strong performance of the SGX FTSE China A50 Index futures and Iron Ore derivatives. 
  • Contribution from derivatives revenues now accounts for 38% (30% in FY14) of total revenue, exceeding the securities market’s 27% (33% in FY14). 
  • Although securities revenues picked up in 4Q15, daily average values for FY15 eased 4% yo-y to S$1.1bn while average clearing fees fell, causing a decline in securities revenues in FY15. 
  • FY15 net profit rose 9% y-o-y to S$349m, in line with our forecast. 
  • Expenses rose (both q-o-q and y-o-y) due to higher staff and technology costs as well as royalties (with growth in derivatives volumes). 
  • The higher expenses also included costs related to the consolidation of its acquisition of the remaining stake in Energy Market Company (EMC), which has been a wholly-owned subsidiary from Oct-14. 

Change in dividend policy; higher base DPS from FY16. 

  • The Board has proposed for SGX’s base DPS to increase to 5 Scts from 4 Scts per quarter and the dividend policy is now a minimum of 80% (no change) or 20 Scts (from 16 Scts), whichever is higher. 
  • FY15 dividend payout was lower at 86% (FY14: 94%). 
  • We have tweaked our dividend payout forecasts accordingly. Dividend yield of c.4% remains supportive of valuations. 

Outlook Initiatives to boost securities market yet to fully bear fruit. 

  • Several measures were implemented in FY15. Some of the initiatives include market‐makers and liquidity providers to add liquidity and depth; board‐lot size reduction and minimum trading price of $0.20. The monthly average retail participation in STI stocks increased 9% after the board-lot size reduction. 

Uncertain global outlook. 

  • The uncertain and volatile outlook for the global economy will continue to pose challenges for the Securities market. 
  • SGX will continue to invest in building its platform and enhance its systems to support its growth strategy. 
  • Enhancements in the pipeline include the implementation of the Post-Trade system next year. 

New CEO appointed; market hopes for new measures to improve business. 

  • Mr Loh Boon Chye has been appointed as the new CEO with effect from 14th July 2015. 
  • Mr Loh, age 51, has been in the financial line for 26 years. From December 2012 to early this year, he was with Bank of America – Merrill Lynch as Deputy President and Head of Global Markets for Asia-Pacific. 
  • He was a director on the Board of SGX from October 2003 to September 2012. 
  • We believe the market is keen to see what the new CEO can do to further improve the securities market structure to boost revenues.

Valuation: 


  • We have a HOLD recommendation with S$7.80 target price based on the dividend discount model which implies 23x CY16F EPS. 
  • Downside to the stock price should be limited, supported by a dividend yield of 4% based on 86-89% dividend payout assumption. 


Key Risks: 


  • Market activity. Slower-than-expected market activity will derail revenue generation. 
  • Derivatives, a growing revenue \generator, could be at risk if products do not generate sufficient trading volumes.


(LIM Sue Lin; LING Lee Keng)

Source: http://www.dbsvickers.com/



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