Singapore Exchange - CIMB Research 2016-10-19: Impressive cost management but partially one-off

Singapore Exchange - CIMB Research 2016-10-19: Impressive cost management but partially one-off SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Impressive cost management but partially one-off

  • SGX’s 1Q net profit of S$83.1m was in line at 102%/23% of our 1Q/FY17 forecast.
  • Securities revenue fell 1% qoq and 16% yoy on lower securities average daily value traded (ADVT) of S$988m (-3% qoq, -19% yoy).
  • Derivatives revenue fell 5% qoq and 22% yoy on fewer contracts traded (-6% qoq, - 24% yoy), partially offset by higher average fee per contract.
  • Expenses were well managed but we expect them to rise in 2QFY17.
  • Maintain Reduce. Our DDM-based target price falls to S$7.04 as we cut our FY17F- 19F EPS by 3-4% and DPS by 1 Sct.

Weak start to the year on lower market volumes 

  • 1QFY17 revenue fell 4% qoq and 13% yoy, dragged down by lower securities revenue (- 1% qoq, -16% yoy) and derivatives revenue (-5% qoq, -22% yoy) as market volatility and hence volumes remained lacklustre after Brexit. 
  • Operating expenses were kept in check (-12% qoq, -8% yoy) as all expense lines came in lower with less variable expenses and good cost management. This led to 4.6% pts qoq improvement in operating profit margin to 50.9%. As a result, core net profit was flat qoq and down 16% yoy to S$83.1m.

Securities likely to remain soft in 2Q before improving in 2H 

  • Securities ADVT fell 3% qoq and 19% yoy to S$988m, as market volumes failed to return after Brexit. Securities clearing revenue, however, remained flat qoq at $36.9m, helped by a higher average clearing rate of 2.89bp. 
  • We expect securities ADVT to remain soft in 2QFY17 as SGX's 2Q is seasonally weak, before rising to S$1.2bn in 2HFY17 on expectations of higher volatility (slight cut from our earlier forecast of S$1.2bn-1.3bn) .

Derivatives saw soft demand but had market share gains 

  • Total derivatives contracts traded fell 6% qoq to 40.1m 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 on the back of lower volatility in the onshore markets.
  • As expected, average fee per contract rose slightly to S$1.18, which brought derivative revenue down a smaller 5% qoq. Despite the lower volume, SGX saw market share gains across most products. We trim our FY17-19F derivative volume by 6%.

Impressive cost savings, but expenses to rise for rest of the year 

  • The key positive surprise was the lower expenses (-12% qoq, -8% yoy) across all lines, due to cost management efforts which led to lower discretionary spend, and lower variable expenses in line with lower market volumes. 
  • Technology expense (-14% qoq, - 4% yoy) saw lower depreciation charges, but management guided for it to trend up in the next quarter as depreciation from new IT systems kick in. 
  • Management kept its FY17 expense guidance at S$420m-430m and technology capex guidance at S$65m-70m.

Maintain Reduce 

  • We maintain our Reduce call, in view of low market volumes as global macroeconomic concerns weigh on investor sentiment. 
  • We trim our FY17-19 EPS forecasts by 3-4% to reflect lower securities and derivatives volumes, partially offset by lower expenses. 
  • We also cut our FY17F-19F DPS by 1 Sct, and our DDM-based target price falls to S$7.04 as a result. 
  • The key risk to our call is a sustained return in market volatility, which could drive up both securities and derivatives trading volumes.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-19
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 7.04 Down 7.240