Singapore Exchange - CIMB Research 2017-04-11: 3QFY17 earnings preview

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SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - 3QFY17 earnings preview

• We expect SGX to report 3Q net profit of S$90.0m (+2% qoq, +1% yoy) on 20 Apr.
• While securities market volumes returned, derivatives volumes softened on lower traded volume of equity index futures and options.
• Listing fees could be supported by strong funds raised through new bond listings.
• M&As and sustained recovery in securities ADVT remain the key catalysts.
• Maintain Add and target price of S$8.09, based on 24x FY18 P/E (historical mean).

Net profit likely to stay flattish in 3Q 

• We estimate SGX’s 3QFY17 core net profit came in at S$90.0m (+2% qoq, +1% yoy).
• Likely positives: 
  1. Pick-up in securities trading activity, 
  2. higher listing fees with more funds raised through bond listings. 
• Likely negatives: 
  1. Lower derivatives volumes as demand for equity index futures and options fell in Jan-Feb, 
  2. despite cost efficiency measures, expenses could be higher qoq on depreciation for new technology capex.

Stronger securities volumes as market activity returned 

• Securities average daily value traded (ADVT) saw a pick-up during the quarter to S$1,242m (+14% qoq, +1% yoy) on the back of more certainty in the US interest rate direction. 
• Feb had a particularly strong showing, with securities ADVT recording an 18- month high of S$1,409m. We believe this drove a 13% qoq and 8% yoy increase in securities clearing revenue to S$45.7m.

Listing fees could be supported by new bond listings… 

• SGX saw 189 new bond listings in 3QFY17 (2QFY17: 204), which raised a record high of S$101.2bn in funds (+14% qoq, +166% yoy). 
• Funds raised through IPOs also rose to S$251m (2QFY17: S$131m, 3QFY16: S$49m), which should drive better listing fees.

… but derivatives saw demand for key contracts taper off 

• Total futures and options traded volume fell to 39.9m contracts (-4% qoq, -18% yoy).
• Key contracts, including the China A50 index futures, saw lower volume (-8% qoq, -30% yoy). 
• Total equity index futures fell (-4% qoq, -22% yoy), as did equity index options (- 3% qoq, -21% yoy). However, the higher-margin iron ore futures held steady qoq.
• Overall, we believe derivatives revenue saw a mild decline to S$73.2m (-2% qoq, -11% yoy) as lower volumes were partially offset by higher average fee per contract.

Expenses could rise on higher depreciation for new technology 

• SGX continues to maintain cost discipline by reducing the number of contract staff, controlling discretionary spending and lowering systems maintenance costs. 
• However, we expect expenses to creep up in 3Q (+8% qoq, + 2% yoy) due to higher depreciation with the onboarding of the new derivatives platform. This could apply slight pressure on the EBIT margin, likely reducing it from 2QFY17’s 51.3% to 49.4% in 3QFY17.

M&As remains a key catalyst 

• SGX remains committed to diversifying its revenue streams to reduce reliance on the securities market and key derivatives contracts. 
• We would not rule out large M&As, with its unrestricted cash balance of S$395m and room to gear up/raise funds. Potential M&A areas: 
  1. fixed income, 
  2. foreign exchange, 
  3. market data, and 
  4. index businesses.

Maintain Add 

• We maintain our Add call on SGX and our target price of S$8.09, based on 24x FY18 P/E (historical mean). 
• We expect higher securities ADVT, cost discipline and more IPOs to drive medium-term earnings growth. 
• Downside risk could stem from the market returning to a risk-off mode amid uncertainty surrounding Trump’s policies.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-04-11

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.090 Same 8.090