Singapore Exchange - CIMB Research 2017-01-19: Decent quarter amid cost discipline

Singapore Exchange - CIMB Research 2017-01-19: Decent quarter amid cost discipline SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Decent quarter amid cost discipline

  • 2QFY17 net profit of S$88.3m was in line with expectations; 1H formed 49%/48% of our/consensus full-year forecasts.
  • Securities ADVT recovered to S$1.1bn (+10% qoq) due to higher volatility on the back of Trump’s victory in the US presidential elections in Nov.
  • Derivative traded volume (+3% qoq) also saw a slight pickup with higher demand for FX futures, rubber futures and iron ore futures.
  • Maintain Hold and DDM-based target price of S$7.23.

Results highlights 

  • Singapore Exchange Limited (SGX) reported a 2QFY17 net profit of S$88.3m (+6% qoq, +5% yoy), Revenue growth of 5% qoq and 3% yoy was driven by a recovery in both securities and derivatives trading volume amid higher market volatility despite Oct-Dec being a seasonally-weak quarter.
  • SGX experienced a slight positive jaws ratio, with its EBIT margin expanding to 51.3% (1QFY17: 50.9%, 2QFY16: 50.1%) as expenses were kept in check.

Expenses kept in check; lowering cost guidance for FY17 

  • Total expenses of S$97.2m in 2QFY17 (+4% qoq, flat yoy) included S$3.6m in professional fees and staff expenses related to its acquisition of the Baltic Exchange.
  • This came in slightly below our expectation on the back of: 
    1. better IT vendor management, 
    2. paced hiring according to business needs, and 
    3. more efficient business processes due to its restructuring exercise. 
  • SGX lowered its operating expense guidance for FY17 to S$405m-415m, down from S$420m-430m previously.

Securities ADVT recovered on higher volatility 

  • Securities revenue of S$52.1m (+11% qoq, +12% yoy) was boosted by higher securities average daily traded value (ADVT) of S$1,091m (+10% qoq, +17% yoy) amid higher market volatility after Trump’s surprise victory in the US presidential elections.
  • November had a particularly strong showing, with securities ADVT rising to S$1,332m (+43% qoq, +37% yoy). The effective securities clearing rate was broadly flat qoq at 2.86bp (1QFY17: 2.89bp, 2QFY16: 2.93bp).

Derivatives traded volume picked up slightly 

  • Derivative revenue came in at S$75.0m (+6% qoq, -3% yoy). Derivative traded volume rose 3% qoq and 5% yoy on the back of higher demand for INR/USD FX futures (+15% qoq, +21% yoy), rubber futures (+49% qoq, +216% yoy) and iron ore futures (+34% qoq, +81% yoy). 
  • The average fee per contract was slightly lower at S$1.16 (1QFY17: S$1.18, 2QFY16: S$1.28) as a result of continued competition in iron ore futures.

Look forward to more IPOs in 2017 

  • CEO Loh Boon Chye guided that the IPO pipeline appears to be healthy, with more listings and funds to be raised in FY17 vs. FY16. 
  • SGX’s sectoral approach to attracting listings appears to be paying off, with the new IPOs expected to come from the consumer, real estate, infrastructure and technology sectors that they have targeted.

Maintain Hold 

  • SGX is trading at 22x forward P/E, which we think has fairly priced in securities ADVT of S$1.1bn in FY17-18F. 
  • We maintain a Hold rating, with an unchanged DDM-based target price of S$7.23. 
  • We raise our EPS slightly for lower expenses, partially offset by lower contract processing revenue. 
  • Upside risks could come from higher market volatility and return of investor confidence amid more positive economic data, while downside risks could stem from the market returning to a risk-off mode amid political uncertainty.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-01-19
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 7.230 Same 7.230