Singapore Exchange - CIMB Research 2016-12-05: Bottomed out

Singapore Exchange - CIMB Research 2016-12-05: Bottomed out SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Bottomed out

  • We expect SGX’s share price to bottom out as recent market volatility could sustain better securities trading volume in the near to medium term.
  • However, we are not convinced of material upside from here as demand for its derivatives products continues to be reliant on volatility in China's A-share market.
  • Maintain Hold. At 21x FY18F P/E, the negatives have largely been priced in, in our view. Our DDM-based target price stays unchanged at S$7.23.

Recent pickup in securities ADVT could sustain

  • Securities daily traded value shot up to as high as S$1.9bn on 9 Nov and 11 Nov on the back of higher market volatility after Trump’s victory in the US presidential elections. 
  • On a blended basis, we expect Nov-Dec to record securities average daily value traded (ADVT) of S$1.1bn-S$1.2bn. We expect this level to sustain for the rest of FY17.
  • We think the conclusion of the US presidential elections and more certainty of a US Fed hike in Dec after the recent positive jobs data removed some macro uncertainties; this should lead to more trading activity as the market shifts into risk-on mode.

Less positive on derivative demand; still reliant on China

  • 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, its volume has halved, and another equally strong rally or sell-off is required for such volumes to return.
  • Meanwhile, margin pressure remains for its iron ore contracts as SGX responds to competition from CME. 
  • While iron ore is not a major contributor to total derivative volumes, its average fee per contract is higher, which makes it a significant contributor to derivative revenue.

Challenges remain

  • While we have turned more positive on SGX recently with the pickup in securities ADVT and the less demanding valuations, we think its challenges remain.
  • We expect SGX’s share price to trade sideways, due to the following factors: 
    1. Delistings continue to exceed IPOs, which could limit upside to trading volumes. 
    2. It is difficult to see demand for key derivative products to return meaningfully in the near term in the absence of an event to trigger a strong rally or sell-off in China's Ashare market. 
    3. For exposure to financials, institutional funds could switch out of SGX into banks as a play on rising rates.

Maintain Hold

  • We maintain our Hold call and DDM-based target price of S$7.23. Dividend yield of 4% is decent.
  • We believe that at 21x FY18F P/E, the market has priced in securities ADVT of S$1.1bn-1.2bn, in line with our forecast over the next few quarters.
  • Upside risk could come from better outlook in China, which would drive derivative demand. 
  • Downside risk could stem from further global macro uncertainty should Trump’s policies disappoint, as this could lead to markets returning to a risk-off mode.

Jessalynn CHEN CIMB Research | 2016-12-05
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 7.230 Same 7.230