Singapore Exchange - CIMB Research 2015-10-21: In the price

Singapore Exchange - CIMB Research 2015-10-21: In the price SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange - In the price 

  • 1QFY16 net profit of S$99.3m was in line at 26% of our full-year forecast. 
  • DPS was raised to 5 Scts from 4 Scts previously, in line with prior guidance 
  • We cut our FY16-18 EPS by 2-3% on expectations of lower derivative traded volume and clearing rate, and higher expenses 
  • We upgrade to Hold from Reduce, as valuations are more palatable at 20x forward P/E, 0.5sd below its historical mean. 

1QFY16 net profit in line 

  • 1QFY16 net profit came in at S$99.3m (+3% qoq, +28% yoy), in line with expectations at 26% of our full-year forecast. 
  • Revenue rose 2% qoq to S$219.6m, with a 20% growth in derivative collateral management revenue offsetting the 12% fall in issuer services revenue given fewer IPOs and bond listings. 
  • Operating expenses were kept in check at S$102.3m (-2% qoq, +25% yoy), bringing operating profit up 6% qoq and 35% yoy to S$117.3m. Management maintained its cost guidance at S$425m-435m for FY16. 

Securities driven by a brief spike in ADVT in Aug 

  • Securities average daily traded value (ADVT) rose 3% qoq to S$1.24bn in 1QFY16 (4QFY15: S$1.20bn). This was driven by a brief spike to S$1.48bn in Aug given market volatility. Securities revenue grew by a smaller 1% qoq to S$55.9m on a slight fall in the securities clearing rate as more rebates were given via the market maker and liquidity provider program (MMLP). 
  • We expect securities ADVT to stay at S$1.2bn for FY16. 

China A50 volumes moderating 

  • After a record quarter in the China A50 index futures in 4QFY15, 1QFY16 saw its traded volume moderate by 11% qoq to 28.4m contracts. This fall was partly offset by higher traded volume of the Nikkei 225 index futures (+28% qoq), but overall derivative volume still fell by 1% qoq to 52.5m contracts. 
  • The effective clearing rate improved on the smaller proportion of lower-margin China A50 contracts. This, together with higher collateral management revenue, brought derivative revenue up 6% qoq to S$90.9m. 

Priority #1 – improve market liquidity to attract listings 

  • Improving market liquidity is at the top of management’s agenda, to attract more IPOs. SGX introduced the MMLP last year for 30 STI stocks, and plans to expand the list to include more small-mid cap names. In 1QFY16, MMLP accounted for 18% of securities traded value vs. 12% in 1QFY15. 
  • The reduction in board lot sizes has also led to an 11% growth in retail trading value in 9MCY15. 
  • For IPOs, SGX is looking to attract listings in the digital and consumer sectors, in addition to its niche in REITs and healthcare. 

Priority #2 – diversify revenue streams 

  • The second priority is to diversify its revenues to reduce reliance on single products (e.g China A50 futures). Areas of focus include: 
    1. FX futures, 
    2. fixed income, and 
    3. market data. 
  • SGX recently launched SGX Index Edge, a provider of Asian-focus index services, and will launch its bond trading platform, SGX Bond Pro, in the next few months. 

Upgrade to Hold 

  • SGX’s share price has fallen 12% since 22 Apr. At 20x forward P/E (0.5sd below mean), we believe the negatives have been priced in. 
  • We upgrade to Hold, with an unchanged DDM-based target price of S$7.98.

Jessalynn CHEN CIMB Securities | Kenneth NGCFA CIMB Securities | http://research.itradecimb.com/ 2015-10-21
CIMB Securities SGX Stock Analyst Report HOLD UPGRADE REDUCE 7.98 Same 7.98