-->

Singapore Exchange - CIMB Research 2016-04-21: 3Q16 results ~ near-term margin pressure

Singapore Exchange - CIMB Research 2016-04-21: 3Q16 results ~ near-term margin pressure SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange 3Q16 results: near-term margin pressure 

  • 3QFY16 net profit of S$89.2m was in line with expectations. 9M formed 77%/76% of our/consensus full-year forecasts. 
  • Securities revenue (+4% yoy) lifted by strong securities ADVT of S$1.22bn in 3Q. We think this is unsustainable as ADVT has tapered off to S$955m in 1-19 Apr. 
  • Derivative traded volume rose 24% yoy on higher China A50 and iron ore volumes, but revenue rose only 3% yoy as the average fee per contract fell 17% yoy. 
  • Maintain Reduce and DDM target price of S$7.16. Near-term de-rating catalysts include lower securities ADVT, margin pressure in derivatives and rising expenses. 


Growth in securities and derivatives offset by higher expenses 

  • SGX reported a 3QFY16 net profit of S$89.2m (+1% yoy). 
  • Revenue grew 3% yoy to S$205.8m on better securities (+4% yoy) and derivatives (+3% yoy), though listing revenue contracted 5% yoy as funds raised from bonds fell 18% yoy in a dry market. 
  • Operating expenses rose faster at 7% yoy, mainly on higher technology expenses (+9% yoy), and volume-related expenses, including processing and royalties (+18% yoy) and staff costs (+7% yoy). As a result, EBIT margin fell 1.8% pts to 49.9%. 

Securities had a good quarter but unlikely to be sustainable 

  • Securities average daily value traded (ADVT) rose 5% yoy to S$1.22bn, but securities revenue rose just 4% to S$54.8m as the average clearing fee fell to 2.90bp (3QFY15: 2.94bp) with higher participation in the market maker and liquidity provider (MMLP) program. 
  • 3Q saw very strong market activity in Feb-Mar amid high volatility, with ADVT averaging as high as S$1.4bn from 1-11 Mar, but this is difficult to sustain. 
  • From 1-19 Apr, ADVT averaged only S$955m. We expect ADVT to taper off to S$1.1bn in 4Q. 

Derivative volume growth doused by lower margin and competition 

  • Derivative traded volume rose 24% yoy to 49m contracts with growth in iron ore options (+335%), iron ore futures (+195%), China A50 futures (+19%) and Nikkei 225 futures (+22%). Yet derivative revenue only rose 3% yoy to S$82.2m as the average fee per contract fell 17% yoy. 
  • The decline was due to: 
    1. larger proportion of lower-margin wholesale trades, and 
    2. revised pricing for its iron ore contracts amid rising competition. 
  • We expect margin pressure to stay as SGX competes for market share in iron ore. 

Betting on China for derivative volume growth in the longer term 

  • SGX has carved a niche in China-centric derivative products (China A50, CNH, iron ore), and will be listing new contracts on the MSCI China Free Index in May to broaden its reach to investors looking at mid-large cap Chinese companies listed outside China. 
  • While promising, we think liquidity and volumes will take time to build up. SGX also sees potential in iron ore and believes it is still in the early stage of growth, but iron ore volumes are still small at 9% of SGX’s total traded volume vs. China A50 futures at 44%. 

Maintain Reduce 

  • We maintain a Reduce call on SGX, with an unchanged DDM-based target price of S$7.16. We see near-term de-rating catalysts of: 
    1. declining securities ADVT, 
    2. margin pressure on derivatives contracts as it tries to grow market share in iron ore products, and 
    3. rising technology and compliance costs.



Jessalynn CHEN CIMB Securities | Kenneth NGCFA CIMB Securities | http://research.itradecimb.com/ 2016-04-21
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 7.16 Same 7.16


Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......