SGX - RHB Invest 2016-10-20: Weak 1Q But Future Bright With Futures

SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Weak 1Q But Future Bright With Futures

1QFY17 net profit of SGD83m was down 16% YoY but up 8% QoQ. This represented 22% of our FY17 net profit forecast of SGD385m.
1QFY17 securities average daily value (SADV) of SGD0.99bn was down 19% YoY, although it was flattish QoQ.
1QFY17 derivatives average daily contract (DADC) of 669k is down 22% YoY. The weakness is largely due to fewer FTSE China A50 Index futures traded YoY – the prior year high base was due to the surge in trading volume of China A50 Index futures in Jul 2015 following the Nov 2014 implementation of the Shanghai-HK Connect.

Derivatives accounted for 37% of total revenue (down from 41% previously).
Interim dividend of 5 cents per share was declared – in line with stated policy. We are forecasting FY17 dividend of 32 cents, giving a yield of 4.4%, which is higher than Singapore sovereign 10-year bond yield of 1.88%.

1QFY17 expenses fell 8% YoY, but cost to income ratio rose to 49% (from 1QFY16’s 47%).
The acquisition of the Baltic Exchange is progressing and SGX expects the transaction to be completed by end Nov 2016. This could help improve the derivatives business.
We maintain our FY17 SADV and DADC assumption of SGD1.27bn and 782k respectively. We believe that by year end, as we have more colour on the trend for US Fed Fund rate, equity trading volumes should improve. For the derivatives portion, we see greater China A50 Index futures trading volume with the implementation of the Shenzhen-HK Connect.
We forecast FY17 net profit growth of 10%, on volume growth.

TP of SGD9.04 (pegged to 25x FY17 EPS) is maintained.
Secondary valuation methodology using DCF yields a slightly higher SGD9.17 TP – based on 8.0% WACC and 1.6% TG.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-20

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