Singapore Exchange SGX - CIMB Research 2016-01-21: Decent quarter amid tough conditions

SINGAPORE EXCHANGE LIMITED SGX S68.SI

Singapore Exchange - Decent quarter amid tough conditions

SGX’s 2QFY16 net profit of S$83.7m came in 5%/6% above our/consensus forecasts. The beat was mainly from lower variable costs as market volumes fell.
Cost guidance for FY16 has been lowered to S$415m-425m (previously S$425m- 435m); cost cutting would come from lower discretionary spending.
We maintain our Hold call, but with a lower DDM-based target price of S$7.16.

2QFY16 net profit of S$83.7m (-3.3% yoy) was slightly ahead as variable staff costs and processing and royalties fees were kept in check amid lower market volumes.
Revenue was flat yoy at S$195m as the fall in securities clearing fees (-10.6% yoy) and listing fees (-12.8% yoy) were offset by higher depository services (+13.7% yoy) and market data revenue (+8.2% yoy).
Operating profit fell 4% yoy to S$98m on a higher cost base.

Securities clearing revenue fell 10.6% to S$36.2m in 2QFY16 due to:
1. 9.5% yoy fall in securities traded value to S$59.5bn and
2. 2% yoy decline in the average securities clearing rate from 3bp to 2.93bp with the introduction of the market maker and liquidity provider (MMLP) programme.
Securities clearing rate improved 3bp qoq due to a lower proportion of shares traded via the MMLP (2Q: 16-18%, 1Q: 18%).
In view of tough market conditions, we cut our securities ADVT for FY16 from S$1.2bn to S$1.1bn.

Derivatives trading revenue fell 2.9% yoy to S$56.3m as total traded volumes fell 1.7% yoy to 39.3m contracts. The fall was due to lower demand for Nikkei 225 index futures and options, partially offset by a doubling of iron ore futures volumes. Other derivatives revenue was boosted by higher collateral management revenue as SGX earned a higher yield on collateral balances, bringing total derivative revenue up 1.5% yoy to S$77.6m. Derivatives now account for 40% of revenue, and remain the key earnings driver.

Market data and connectivity revenue grew 8.2% yoy to S$21.6m, driven by higher demand for derivatives market data and growth in colocation services.
Depository services revenue rose at a faster 13.7% yoy to S$29.3m on the back of higher securities settlement fees with an increase in institutional settlement instructions.
We see growth in these two areas as encouraging given the headwinds in the securities business.

Management lowered its cost guidance for FY16 to S$415m-425m, down from S$425m- 435m. Cost cuts are expected to come from:
1. re-prioritising technology projects,
2. lower discretionary spending and
3. lower premises cost as SGX will no longer expand its office space.
We expect costs to come in at the lower end, in line with poor volumes.

Maintain Hold, with a lower DDM-based target price of S$7.16 as we cut DPS by 2-3 Scts in FY16-18, in line with lower net profit.
Though 2Q results were a slight beat, we cut FY16-18 EPS in expectation of lower securities and derivatives volume in 2H.
At 19x forward P/E, we think the negatives have been priced in.

Jessalynn CHEN CIMB Securities | Kenneth NGCFA CIMB Securities | http://research.itradecimb.com/ 2016-01-21

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 7.16 Down 7.98