SGX - RHB Invest 2016-04-08: Strength In Both Securities And Derivatives Volumes

SGX - RHB Invest 2016-04-08: Strength In Both Securities And Derivatives Volumes SINGAPORE EXCHANGE LIMITED SGX S68.SI 

SGX - Strength In Both Securities And Derivatives Volumes

  • SGX is reporting its 3QFY16 results on 20 Apr, and we expect earnings to be driven by the sequential strength in securities and derivatives market volumes, up 30% and 28% respectively. 
  • The China A50 Futures trading volume was up strongly this quarter after the 2QFY16 lull. We are optimistic on the counter. 
  • Maintain BUY and SGD8.13 TP (6% upside), pegged to 23x FY17F P/E. 
  • Total returns, including a 4% dividend yield, would be ~10%. 
  • Our target P/E is below the historical 25x average.

3QFY16 (Jun) securities market turnover rose 30% sequentially. 

  • The Singapore Exchange’s (SGX) 3QFY16 securities average daily value (SADV) was up 30% QoQ to SGD1.17bn. This is positive for the SGX’s upcoming results. 
  • We noted that momentum gathered strength through the first three months, with January’s SADV of SGD1.09bn being followed by both February’s and March’s SGD1.21bn. 
  • We maintain our assumption of FY16 SADV of SGD1.17bn vis-à-vis 9MFY16’s SGD1.09bn.

Derivatives volume was commendable. 

  • 3QFY16 derivatives average daily volume of 819,000 was up an equally strong 28% QoQ. 
  • 9MFY16 derivatives average daily volume was 759,000, and we were assuming 754,000 for FY16. 
  • Contributing to the 3QFY16 rebound was a 26% jump in the China A50 Futures trading volume, which account for 44% of the volume share. This is as the volatility in the Chinese equity markets generated increased trading volumes in the futures index. 
  • Derivative trading is an important component of revenue, accounting for ~40% share.

Top Glove’s (TOPG MK, NEUTRAL, TP: MYR5.63) secondary listing a precursor of more to come? 

  • Bursa Malaysia-listed Top Glove is proposing a secondary listing on the SGX. It announced in early April that it had submitted an application to the Securities Commission Malaysia (SC) seeking approval. 
  • A successful listing on the SGX may lead to more of such secondary listings, hence, positive for SADV.

More derivative initiatives. 

  • The SGX recently announced its intention to list contracts on the MSCI China Free Index, which would further broaden its suite of China-linked risk management products. 
  • Separately, a National Stock Exchange group company and the SGX also announced their intent to introduce futures on Indian sector-specific index futures on the Singapore bourse. 
  • All these initiatives reflect the SGX’s drive to grow its derivatives revenue.

Both P/E and DCF methodology point to a BUY call. 

  • We peg our TP to a target 23x FY17F P/E (lower than the 5-year average of 25x), which results in a TP of SGD8.13. Our DCF methodology gives a higher SGD9.17 fair value, based on 8.8% WACC and 2% TG. 
  • SGX’s dividend yield of 4% is attractive, higher than the sovereign 10-year bond yield of 1.9%.

Leng Seng Choon CFA RHB Invest | 2016-04-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 8.13 Same 8.13