SGX - RHB Invest 2016-01-21: Derivatives Show Resilience

SGX - RHB Invest 2016-01-21: Derivatives Show Resilience  SINGAPORE EXCHANGE LIMITED SGX S68.SI 

SGX (SGX SP) - Derivatives Show Resilience 

  • 2QFY16 net profit of SGD83.7m (-3% YoY) was in line, representing a quarter of our FY16 forecast. 
  • Maintain BUY with an unchanged SGD8.13 TP (22% upside), pegged to 23x FY17 P/E. 
  • 2QFY16 securities total value traded was down 9% YoY, while derivatives volume was down a milder 2% YoY. 
  • We remain optimistic on the derivatives market potential, and SGX’s P/E valuation is more than 2SD below the historical average. 

 Derivatives volume was resilient. 

  • Although 2QFY16 (Jun) derivatives average daily volume fell 22% QoQ to 638,000, it was flat YoY. 
  • The China A50 Index futures remain an important component, accounting for 45% share of volume. 
  • The volumes traded for Nikkei 225 Index futures collapsed by a third YoY, but there were offsetting gains for the Iron Ore futures. 
  • We are assuming 754,000 overall derivatives average daily volume for FY16, with the volatility in the Chinese equities market possibly generating increased volumes traded in the futures index – derivatives account for 39% revenue share and are thus important. 

 Securities market turnover was unexciting. 

  • Securities total value traded was down 9% YoY, with Dec 2015 being a particularly weak month. 
  • We are assuming FY16 securities average daily value (SADV) of SGD1.17bn, on the back of slightly stronger volumes (from current levels) as we go forward. 

 Both P/E and DCF methodologies yield rather similar TP. 

  • We peg our TP to a target 23x FY17 P/E (lower than the 5-year average of 25x), which results in a TP of SGD8.13. We corroborate this result through DCF (our DCF methodology gives SGD8.38 fair value). 
  • Singapore Exchange Ltd (SGX) lowered its guidance for FY16 expenses given the current market weakness. 
  • Its dividend yield of 4% is attractive – SGX maintains its policy of higher annual dividend of 20 cents or 80% of NPAT. 

 Current SGX’s share price has factored in a bear-case scenario. 

  • If we assume an unchanged SADV, with a P/E compression due to market conditions (assuming a P/E multiple at -2SD, or 20x), we have a SGD7.00 TP – which is close to the current price. 

Leng Seng Choon CFA RHB Invest | 2016-01-21
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 8.13 Same 8.13