Singapore Exchange Limited - Phillip Securities 2016-03-03: Buffeted by equity rout but long term growth intact

SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange Limited - Buffeted by equity rout but long term growth intact

While London Stock Exchange and Deutsche Boerse are in negotiations to create Europe’s biggest exchange with a combined business worth of more than £20 bn. SGX has submitted a non-binding bid for the acquisition of The Baltic Exchange. The discussions for this acquisition are still preliminary.
The Baltic Exchange’s main source of revenue is from membership subscriptions and member access to freight market information.
We view this as complimentary to SGX’s initiative to strengthen their market position as a purveyor of market data.

Baltex is Baltic Exchange’s regulated trading venue for dry FFA block futures. Though Baltex as a venue for presenting block futures was rolled out in December 2014, it has already represented 40% of all dry FFA volume. But we view that Baltex isn’t the crown jewel in this potential acquisition.
2015 Turnover for Baltic was £6 mn of which £4.8 mn was from membership activities, the other £1.2 mn was from property.
Membership subscription and member access to freight market information alone was £2.6 mn. Other membership activities include training and legal matters.
Evidently, Baltex offers a value proposition for SGX in the segment of market data and connectivity as SGX takes on a front footed initiative to drive growth from value added services.
To be sure, Baltex is important because Baltic is paid information licence fees by major clearing houses based on FFA volumes.

Baltic Exchange’s online sales of information by direct subscription was 0.35mn Gbp in 2015.
We view that SGX’s digital infrastructure could add synergy to this initiative and use its clout to grow membership.
Aside from the LME, SGX is competing against CME, ICE and Platts for the acquisition.
How much do its cost?
Market is estimated the acquisition could worth some £84 mn (or S$117 mn), this translated to 63x FY15 PER or 3.2x PBR.
We view this price tag is a bit pricey on Baltic’s earnings but look reasonable on book valuation (excluding its £15.5 mn investment fixed asset, PBR will be around 7.8x).
After S$207 mn cash set aside for SGX-DC's clearing fund, as of end December 2015, SGX cash and cash equivalents of S$512 mn with zero gearing.

Securities revenue fell 9.8% yoy with SDAV down 11% yoy to S$0.9bn.
Average clearing fee was down from 2.00bps in 2Q15 to 2.93bps in 2Q16 on the back of a dip in turnover velocity (-2.8% yoy) from 36% in 2Q15 to 35% in 2Q16.
We view this is a temporary weakness and 3Q16 would likely see an uptick in trading activity from bargain hunting.

Derivatives revenue up 1.5% yoy though contracts volume fell from 40.0mn in 1Q16 to 39.3mn in 2Q16 owing to decline in volumes in Japan Nikkei 225 futures offset by an increase of 121% in Iron Ore volumes during the same period.
Average yield per contract increased to S$1.28 (2Q15: S$1.30).

TWSE subsidiary Global Link Securities is joining the SGX as a remote trading member, allowing member brokers to directly trade SGX-listed securities through Global Link in the second quarter this year. This will make such international trades more efficient and cost-effective for Taiwan investors.
We expect a boost in liquidity in markets from this initiative.

Maintain “Accumulate” with lower new target price of S$8.28, based on its 24.5x average 5-year historical PER.
Potential catalysts including the market trading sentiments is improving sequentially, Jan-16 securities daily average value (SDAV) have increased 50% mom to S$1.2 bn as compare to S$0.9 bn in CY4Q15 and S$1.1 bn in CY15.

Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2016-03-03

Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 8.28 Same 8.28