Singapore Exchange - DBS Research 2015-10-22: Volatility-led improvement

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SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange - Volatility-led improvement 

• 1Q16 net profit of S$99m (+28% y-o-y); revenue +30% to S$220m, in line. 5-Sct DPS declared. 
• Securities up; continued growth from Derivatives 
• Challenging outlook for Securities; diversifying business mix to reduce reliance on Derivatives. 
• Maintain HOLD, TP S$7.80. 

Highlights 

Improved securities revenues; continued derivatives growth growth 

• SGX reported 1Q16 net profit of S$99m (+28% y-o-y) while revenue gained 30% y-o-y to S$220m, in line with our forecasts, on the back of the increased activities from the recent volatility in global markets. A 5-Sct base DPS was declared, up from 4 Scts previously, with dividend payout policy of at least 80%. 
• Securities revenue increased 14% y-o-y to S$55.9m and accounted for 25% of total revenue, compared to 29% in 1Q15. Securities daily average traded value (SDAV) increased 27% to S$1.23 bn as the SDAV of ST Index stocks increased 61%, partly from improved retail participation after board lot size was reduced. Q-o-q, there was little change in securities revenues. 
• Derivatives revenue increased 69% to S$90.9m, and now accounts for 41% (32% in 1Q15) of total revenue. The strong growth was driven primarily by the SGX FTSE China A50 Index futures, and also Nikkei 225 Index and CNX India Nifty Index futures. On a quarterly basis, derivatives volumes were a tad lower and there was a corresponding decline in royalties. 
• Within “Other revenues”, issuer services was the only segment that registered a decline in revenue, -6% y-o-y to S$21m, on the back of few new listings of shares and bonds. 

Outlook 

Unveiling new priorities 

• Under the helm of its new CEO, Mr Loh Boon Chye, three key priorities were highlighted. No timeline was given as these priorities are earmarked to drive SGX’s business over the longer term. 
  1. Increasing liquidity of securities market liquidity of securities market liquidity of securities market 
     • SGX has implemented several initiatives to boost liquidity of the securities market, including Market Maker and Liquidity Provider (MM/LP) programmes. MM/LP participants now account for about 18% of traded value, compared with 12% in 1Q15. 
     • The reduction in board lot size has also led to an increase in retail participation in the overall market as well as the STI stocks. Based on the past nine months, there was an 11% increase in overall retail SDAV and a 24% increase in retail SDAV in STI stocks. 
  2. Diversifying business mix Diversifying business mix 
     • To reduce its reliance of the Derivatives segment, SGX will 
     1. Grow the market for currency futures; 
     2. Develop into a regional fixed income platform, with the launch of its bond trading platform – SGX Bond Pro – in the coming months; and 
     3. Grow its market data and index businesses. SGX recently launched SGX Index Edge, a service that creates and offers comprehensive index services tailored for Asian market participants. 
  3. Maintaining cost discipline
     • Operating costs and capex will closely track revenues generated. No change in FY16 guidance for operating expenses at S$425-435m while technology-related capex is guided at S$75-80m. 

Challenging outlook for Securities market 

• The uncertain and volatile outlook for the global economy will continue to pose challenges for the Securities market. The December quarter is typically a slow and quiet quarter and hence the next quarter’s revenues and earnings could see a decline. Post-trade system completion could open up to additional product lines 
• Once the post-trade system is completed (expected to be in 2016), SGX will be able to offer Single Stock Options to retail participants. This should add new revenue lines to the exchange. 

Valuation: 

• We have a HOLD recommendation with a S$7.80 target price based on the dividend discount model which implies 23x FY16F EPS. 
• In terms of PE, SGX is trading at comparable PE relative to peers like Bursa Malaysia. SGX is cheaper than HKEX but its growth pales in comparison. 
• Downside to the stock price should be limited, supported by a dividend yield of about 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. 

Sue Lin Lim DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2015-10-22

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 7.80 Same 7.80