SGX - RHB Invest 2016-09-14: Excitement From China A50 Index Futures

SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Excitement From China A50 Index Futures

Over the past few years, SGX has become more dependent on non-Singapore related businesses.
Whilst recent SADV numbers are unexciting, we are bullish, on the back of a potential pickup in SADV in 2HFY17.
The impending commencement of the Shenzhen-HK Connect could catalyse more trading of the China A50 Index Futures, which accounts for a high-teens percentage revenue share.

Maintain BUY and SGD9.04 TP (19% upside), pegged to 25x FY17F P/E, which is 1SD above the 1.5-year mean of 23.1x.

In the past (e.g. FY10 (Jun)), SGX is more “Singapore” centric. Its securities market (inclusive of related services such as provision of market data and issuer services) accounted for almost 80% of revenue share. Since then, the sharp expansion of the derivatives business – mainly non-Singapore indices such as SGX FTSE China A50 Index Futures (China A50), Nikkei 225 and Nifty 50, amongst others – has led to the securities market accounting for only 60% of revenue share.
Expected further expansion of the derivatives business (with the Baltic Exchange acquisition being an indication of SGX’s longer-term plans) could lead to the securities revenue share falling even more. Hence, SGX can be seen as ironically iconic.

SADV has been lacklustre over the past few months, with July and August SADV hovering around SGD1bn, lower than FY16’s SGD1.1bn.
We have assumed a FY17 SADV of SGD1.27bn, on expectations of more trading activities, as we get more colour on the trend for the US Federal Reserve fund rate and more clarity for equity markets going forward.

For the derivatives business, FY16 derivatives average daily contract (DADC) of 732,000 was up 14% YoY. Derivatives already accounted for 40% revenue share and this could rise with the Shenzhen-HK Stock Connect (commencing late-2016) likely to drive trading volumes of the China A50.
We are forecasting overall DADC for FY17 to rise 7% YoY.

We peg our TP to a target 25x FY17F P/E (1SD above the 1.5 year mean of 23.1x). This gives us a TP of SGD9.04. At the same time, our DCF methodology leads to a slightly higher SGD9.17 fair value.
Note that SGX’s dividend yield of 4% is attractive, compared with the sovereign 10-year bond yield of 1.74%.
What is iconic for SGX is that its name denotes “Singapore” but revenue is increasingly being derived from “non-Singapore” sources, eg China A50, Baltic Exchange, etc.
We maintain our BUY recommendation.
The key risk to our call will be global economic trends.

The two parties have agreed on the terms of acquisition. Baltic Exchange shareholders will receive for each Baltic Exchange share:
1. GBP160.41 in cash;
2. GBP19.30 special dividend in cash.
In aggregate, the cash price and special dividend value Baltic Exchange at GBP87m (around SGD153m).
Completion of the acquisition is expected to occur towards end November.
The acquisition price is 90x earnings – based on a FY16 (Mar) Baltic Exchange PAT of GBP0.97m, and a lower 39x based on Mar 2015 PAT.
Baltic Exchange earnings represent less1% of our FY17 net profit forecast for SGX.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-09-14

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.04 Same 9.040