Singapore Exchange - CIMB Research 2016-11-22: Turns out, Trump was just what the market needed

SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Turns out, Trump was just what the market needed

SGX’s share price has de-rated since Apr as global macro uncertainty has weighed on investor sentiment and led to poor securities trading volumes.
Recent market volatility on the back of a Trump win and more certainty of a Fed hike in Dec could sustain better trading volumes in the near- to medium-term.
At 21x FY18 P/E, we think the negatives have been priced in. Yield is decent at 4%.

Upgrade from Reduce to Hold. We tweak our FY17-19F EPS for higher securities ADVT, offset by lower derivative volume. Our DDM target price rises to S$7.23.

SGX has seen dire securities average daily value traded (ADVT) in 2016 as markets were in risk-off mode amid global macro uncertainty, with market activity still not returning after Brexit.
The lack of IPOs also contributed to the lacklustre market volumes, with securities ADVT averaging S$1,035m from Jan-Oct 2016 (-11% yoy). This was reflected in the 11% decline in its share price from the recent peak in Apr.

From 1-21 Nov, securities ADVT averaged S$1,263m on the back of higher market volatility after Trump’s victory. We think the conclusion of the US presidential elections and more certainty of a Fed hike in Dec after the recent positive jobs data have removed some macro uncertainties, and could lead to securities ADVT sustaining at a higher level of S$1.1bn-1.2bn in the quarters ahead.
We tweak our FY17-19F EPS estimates to factor in higher securities ADVT.

SGX’s key derivative products are dependent on the Chinese market, especially the China A50 futures which formed 49% of total derivative traded volume in FY16. China A50 futures demand was especially strong during the A-share market rally and crash in 2015. Since then, it has leveled off and another rally or sell-off is required for stronger volumes to return.
Meanwhile, margin pressure remains for its iron ore contracts as SGX responds to competition from CME.

While valuations have come off to more palatable levels and trading volumes seem to have come out from a rout, we are not yet convinced of a meaningful upside from here.
Instead, we think SGX’s share price could trade sideways as several challenges remain: 1) delistings continue to exceed IPOs, 2) it is difficult to see demand for key derivative products to return meaningfully in the near term, and 3) for exposure to financials, institutional funds could switch out of SGX into banks as a play on rising rates.

We upgrade SGX to Hold, as the recent market volatility could provide support for trading volumes. At 21x FY18 P/E, we think the market has priced in securities ADVT of S$1.1bn-1.2bn.
Our DDM-based target price rises to S$7.23 as we tweak FY17-19F EPS for higher securities ADVT, offset by lower derivative volume.
Upside risk could come from a better outlook in China, which would drive derivative demand; downside risk could stem from macro uncertainties should Trump’s policies disappoint.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-11-22

CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 7.23 Up 7.040