SGX - RHB Invest 2016-12-02: Strong SADV After US Presidential Elections To Persist

SGX - RHB Invest 2016-12-02: Strong SADV After US Presidential Elections To Persist SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Strong SADV After US Presidential Elections To Persist

  • Since the US Presidential Elections in early November, there has been a marked pick-up in SGX’s SADV. 
  • November SADV of SGD1.3bn was 36% higher vs the average of SGD0.96bn from Jul-Oct. We expect the higher SADV to persist, as interest rate normalisation takes place. 
  • The 5 Dec launch of the Shenzhen-Hong Kong Connect could catalyse more trading of China A50 Index Futures, which account for a high-teen percentage revenue share. 
  • Maintain BUY with revised TP of SGD9.10 (from SGD9.04, 25% upside), pegged to FY18F P/E of 25x (1SD>1.5-year mean of 23.1x).

Sharp SADV pickup in November to persist. 

  • Securities average daily value (SADV), which had been lacklustre over the past few months, picked up sharply in November to SGD1.3bn vs the average SGD0.96bn during Jul-Oct. The sharp increase came about after the 8 Nov US Presidential Elections. 
  • We have assumed FY17F SADV of SGD1.27bn, on expectations of more trading activities – as the Federal Reserve (Fed) raises rates, more funds would switch to equities from fixed income instruments.

More trading volume for China A50 Index Futures going forward? 

  • For the derivatives business (~40% of SGX’s revenue), the 4MFY17 derivatives average daily contract (DADC) of 639,000 was lower than FY16’s 732,000. However, with the 5 Dec launch of the Shenzhen-HK Stock Connect, we expect stronger trading volumes for the China A50 Index Futures – where trading volumes account for ~ 40% of total derivatives trading volume. We are forecasting FY17 overall DADC to rise 7% YoY.

Acquisition of Baltic Exchange would also help improve SGX’s derivatives business, in our view. 

  • The acquisition was completed in early November. The despatch of consideration and payment of special dividend to Baltic Exchange shareholders should have been completed in late November. 
  • Whilst the acquisition would add a small 1% of net profit to SGX, it reflects SGX’s aim in expanding into new markets to grow its derivatives business.

SGX remains attractive. 

  • We peg our TP to a target FY18F P/E of 25x (1SD above the 1.5-year mean of 23.1x). This gives us a TP of SGD9.10, which is slightly higher than our previous SGD9.04 TP, as we roll over our target valuation to FY18. 
  • At the same time, our DCF methodology leads to a fair value of SGD9.15, which supports our TP. Note that SGX’s dividend yield of 4.4% is attractive, compared with the sovereign 10-year bond yield of 2.3%. 
  • We maintain our BUY recommendation on the stock. 
  • The key risk to our call would be global economic trends.

Leng Seng Choon CFA RHB Invest | 2016-12-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.10 Up 9.040