Singapore Exchange - CIMB Research 2016-04-06: See you again

SINGAPORE EXCHANGE LIMITED SGX S68.SI

Singapore Exchange - See you again

SGX’s share price has hit a recent high; we think the market is pricing in an overly optimistic outlook as recent volumes are unlikely to be sustained.
Securities ADVT has tapered off in the last three weeks of Mar after a strong showing in Jan-Feb. We expect volumes to stabilise at current levels.

Investments continue to weigh on margins, especially as revenue growth slows. Our estimates factor in the low end of the S$415m-425m cost guidance range.
Downgrade from hold to Reduce, with an unchanged DDM-based TP of S$7.16.

SGX’s share price has gained 18.8% from its low of S$6.65 on 20 Jan, outperforming the STI (+10.8%). The stellar performance was led by a recovery in securities average daily value traded (ADVT) amid higher market volatility.
At the current 23x FY17 P/E, the market is pricing in a sustained recovery in securities ADVT to the S$1.3bn seen in Feb and early Mar, which we think is too bullish.

Securities market activity picked up in mid-1Q16, driven by the Financials and Industrials sectors.
The STI fell 12% from 2,883 pts on 31 Dec to a low of 2,533 pts on 21 Jan, before gaining 15% to 2,907 pts on 18 Mar.

ADVT reaching $1.3bn in Feb, the highest in six months. However, ADVT has tapered off in the last three weeks of Mar to S$1.1bn, a level that we think is more sustainable. Despite this, SGX’s share price continues to hold up and lag the decline in ADVT.

We expect EBIT margins to fall in 2HFY16 as cost growth outpaces revenue growth. Costs are largely led by investments in technology and new projects, while SGX also added headcount in risk and regulatory units.
Management has guided for operating expenses of S$415m-425m in FY16, and our estimates currently factor in the lower end of the range, in line with expectations of lower market volumes.
Costs could surprise negatively and be a downside risk to our forecast.

Amid comparatively stable securities contributions, derivatives have been the swing factor in SGX’s revenue.
SGX’s key products remain the China A50 and Nikkei 225 futures, which accounted for 50% and 14% total derivative volume in 1HFY16 respectively. Volume of the China A50 futures reached a peak of 14.1m contracts in Jul 2015 amid the A-share rally, but has since halved to 6m-8m. Though new product suites continue to be added, we think it will take time for volumes of these products to ramp up.

We downgrade SGX from hold to Reduce, with an unchanged DDM-based target price of S$7.16.
SGX is trading at its historical mean of 23x forward P/E, which implies the market is pricing in sustained securities ADVT of S$1.3bn vs. the average of S$1.1bn in the last three weeks of Mar.
We would look to trim exposure after the recent rally.

Jessalynn CHEN CIMB Securities | Kenneth NGCFA CIMB Securities | http://research.itradecimb.com/ 2016-04-06

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 7.16 Same 7.16