Singapore Exchange - DBS Research 2016-04-21: Challenging outlook

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SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange - Challenging outlook 

• 3Q16 results slightly below; 5cts DPS declared 
• Improved market activities boosted Securities; derivatives hit by lower contract values 
• Securities and Derivatives markets remain challenging 
• Downgrade to HOLD; TP reduced to S$7.70 

Downgrade to HOLD after stellar performance. 

• Singapore Exchange (SGX)’s share price has surged 21% since our upgrade in January this year. 
• Valuations on forward PE and P/BV basis are currently close to average, vs -2SD level back in January. 
• We continue to see challenges persisting in the Securities market, as well as the Derivatives business. 
• Downgrade to HOLD, TP reduced to $7.70. 

3Q16 results slightly below; 5cts DPS declared for the quarter 

• 3Q16 revenue was 3% y-o-y higher at S$205.8m while net profit was up 1% to S$89m. 
• 9M16 revenue of S$620.1m and net profit of S$272.2m accounted for 71% of our full year estimates. 
• Improved market activities boosted Securities revenue while derivatives hit by lower contract values. 
• Securities accounted for 27% of total revenue in 3Q16 (24% in 2Q16), vs 40% for Derivatives (40% in 2Q16). 

Boosting liquidity in the Securities market a major focus; derivatives is still the front-runner for growth. 

• Derivatives will continue to be the main growth driver until SGX is able to monetise initiatives put forth to improve the Securities market microstructure. 
• Key priorities include: 
  1. increase liquidity of the securities market; 
  2. diversify its business mix; and 
  3. maintain cost discipline. 
• We believe the results of these priorities would only be visible over the medium to long term. 

Valuation: 

• We have tweaked our earnings forecast for FY16F/17F/18F down by 7%/4%/3%, after adjusting for lower derivatives contract value. 
• Our TP is accordingly reduced to S$7.70, from S$7.80, based on the dividend discount model, which implies 24x FY16F EPS. Dividend yield is decent at 3.7% for FY16F. 

Key Risks to Our View: 

• Market activity. Slower-than-expected market activity could derail revenue traction. 
• Derivatives, a growing revenue generator, could be at risk if products do not generate sufficient trading volumes. 

LING Lee Keng DBS Vickers | Sue Lin Lim DBS Vickers | http://www.dbsvickers.com/ 2016-04-21

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 7.70 Down 7.80