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.

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 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) .

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%.

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.

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