Singapore Exchange - DBS Research 2016-07-28: Managing costs amid challenging outlook

SGinvestors.io

SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange - Managing costs amid challenging outlook

• 4Q16 net profit down 20% on higher expenses.
• Securities revenue eased 2% but Derivatives up 10%.
• Tweaked earnings up for FY17F and FY18F by 2% each to account for lower expenses.
• Maintain HOLD; TP marginally higher at S$7.80.

Cost management key in this challenging environment. 

• We continue to see challenges persisting in both the Securities market, and the Derivatives business. 
• Derivatives will be the main growth driver until SGX is able to monetise initiatives that it has put in place to improve the market microstructure. 
• Costs management will be one of the key factors to boost bottomline. 
• Valuations on forward PE and P/BV basis are currently close to average. 
• Maintain HOLD; TP marginally higher at S$7.80.

FY16 results in line; final DPS of 13Scts proposed

• SGX reported a 20% drop in 4Q16 (FYE June) net profit to S$76.8m, on 8% drop in turnover to S$198.1m, due to higher expenses. For the full year, results were in line. 
• Revenue was up 5% to S$818.1m while net profit was flat at S$349.0m. 
• A final DPS of 13Scts was proposed. Total DPS of 28Scts represents an 86% payout ratio for FY16. 
• Securities revenue eased 2% but Derivatives was up 10%. 
• Overall, Securities accounted for 25% of total revenue, down from 27% in FY15 while 

Derivatives made up 40%, an increase from last year’s 38%.

• 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 to improve the Securities market microstructure. 
• We believe the results of these priorities would only be visible in the medium to long term. SGX is also working on the regulatory front to further enhance the corporate governance of SGX.

Valuation:

• We have raised our earnings forecast for FY17F and FY18F by 2% each to account for lower expenses, as guided by the management vs our earlier forecast. 
• Maintain HOLD call; TP is marginally higher at S$7.80, up from S$7.70, based on the dividend discount model. 
• Dividend yield is decent at about 4% for FY17F.

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/ 2016-07-28

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 7.80 Up 7.70