Singapore Exchange - CIMB Research 2016-10-12: Markets remain lacklustre

Singapore Exchange - CIMB Research 2016-10-12: Markets remain lacklustre SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Markets remain lacklustre

  • We expect SGX to post a 1QFY17 net profit of S$81.3m (-2% qoq, -18% yoy).
  • Securities average daily value traded (ADVT) declined 3% qoq to fall below S$1bn, as market activity remained subdued after Brexit.
  • Derivative traded volume fell 6% qoq on lower demand across all key products, including equity index futures, iron ore futures and FX futures.
  • Maintain Reduce, with an unchanged DDM-based target price of S$7.24. We see further near-term pressure going into a seasonally-weak quarter.

Expect a weak start to FY17 

  • SGX will be reporting its 1QFY17 earnings after market close on 19 Oct. We expect its net profit to come in at S$81.3m (-2% qoq, -18% yoy), which forms 22% of ours and consensus' FY17 forecast. 
  • We expect the weaker performance to be dragged by lower securities ADVT (-3% qoq, -20% yoy) and fewer derivatives contracts traded (-6% qoq, - 24% yoy). 
  • Despite a recovery in the STI post-Brexit, trading volumes have remained challenging.

Securities ADVT below S$1bn, further declines after Brexit 

  • Securities ADVT came in at S$988m in Jul-Sep, a disappointing 3% fall qoq after an already challenging 4QFY16 when markets were in a risk-off mode leading up to Brexit.
  • We see potential downside risk to our FY17 securities ADVT forecast of S$1.1bn as 2Q is the seasonally weakest quarter, which implies a sustained recovery to S$1.2bn-1.3bn is needed in 2HFY17. 
  • Recall SGX only achieved this level in Feb-Mar with large swings in the STI; we think a big event is needed to trigger such heightened market volatility.

Derivative volume fell, though margins could have improved 

  • Derivative traded volume was down 6% qoq to 40.1m contracts, as demand for China A50 futures (-4% qoq), Nikkei 225 futures (-13% qoq), Nifty futures (-3% qoq), iron ore futures (-8% qoq) and FX futures (-5% qoq) fell. However, we think the average fee per contract could have improved qoq on smaller proportion of lower-margin contracts.
  • Overall, we expect derivative revenue to decline 3% qoq to S$72.6m.

Baltic Exchange acquisition unlikely to move the needle 

  • SGX’s S$153m acquisition of the Baltic Exchange is expected to close in end-2016.
  • Based on the Baltic Exchange’s latest 2016 annual report (FYE Mar), its operating margin of 9-11% in FY15-16 is much below SGX’s 50%. Net profit of £0.97m-2.25m will also hardly move the needle at 0.4%-1.0% accretion to our FY17 earnings forecast.
  • Forward freight agreement futures and options currently make up a mere 0.3% of total derivative traded volume on SGX.

Maintain Reduce on near-term pressure 

  • Although SGX’s share price has fallen 8% since its peak in Apr, we still see downside risk amid sustained weakness in securities and derivative volumes. 
  • Near term, we expect market activity to remain subdued, going into a seasonally weak quarter. 
  • A key risk to our call would be a series of big market events that could trigger panic selling and drive up ADVT for a sustained period, or if demand for the China A50 futures (40% of total derivative volume) returns in a big way

Jessalynn CHEN CIMB Research | 2016-10-12
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 7.240 Same 7.240