Singapore Exchange - CIMB Research 2017-04-20: Operating Margin Surprises On Cost Discipline

Singapore Exchange - CIMB Research 2017-04-20: Operating margin surprises on cost discipline SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Operating margin surprises on cost discipline

  • SGX reported 3QFY17 core net profit of S$87.0m (-1% qoq, -2% yoy). 9MFY17 core net profit was broadly in line at 73%/72% of our/consensus full-year forecasts.
  • Securities revenue of S$55.3m (+6% qoq, +1% yoy) did well on the back of a recovery in securities ADVT to S$1,242m, though average clearing fee was lower.
  • Derivatives revenue of S$75.2m beat our estimate on higher avg. fee per contract.
  • The key positive surprise was operating margins sustaining at 51% on the back of continued cost discipline, with operating expenses down 3% yoy.
  • Maintain Add, with a slightly higher target price of S$8.16 (24x FY18 P/E) as we tweak our FY17-19F EPS for lower opex but higher tax rate.

Decent quarter masked by higher taxes 

  • 3QFY17 core net profit was broadly flat at S$87.0m. 
  • Positives include a recovery in securities average daily value traded (ADVT) and higher listing fees (+5% qoq, +10% yoy), driven by a record S$101.2bn in funds raised from new bond listings. These helped to offset a sequential rise in operating expenses (+3% qoq, -3% yoy) due to depreciation for new systems and a S$1.5m contribution to brokerage firms to improve operational resilience. 
  • Higher taxes made up for the key variance from our forecast of S$90.0m.

Good cost discipline led to relatively steady operating margin 

  • Operating margin held steady at 50.8% (2QFY17: 51.3%), above our expectation of 49.3% on lower technology, processing and professional fees. SGX kept its opex guidance of S$405m-415m for FY17, which implies minimum opex of S$114m in 4QFY17 (+15% qoq, +7% yoy). 
  • Management explained this is due to seasonality, new hires, depreciation for new systems and higher processing fees in line with expectations of higher derivatives volumes. We expect slightly lower opex of S$400m.

Securities saw increase in both retail and institutional participation 

  • Securities revenue rose 6% qoq/1% yoy to S$55.3m on higher securities ADVT of S$1,242m (+14% qoq, +1% yoy), the highest since 1QFY13. This was driven by an increase in both retail (+18% qoq, +7% yoy) and institutional (+14% qoq, +2% yoy) participation. In particular, retail market share has grown to 25% (previously 23-24%).
  • Despite higher volumes, the slight miss in revenue was due to lower average securities clearing fee of 2.80bp (2QFY17: 2.86bp). We expect ADVT to sustain at S$1.2bn.

Derivatives had a weak start to 2017 but volumes picked up in Mar 

  • Derivatives revenue held up well at S$75.2m (+0.3% qoq, -9% yoy) despite traded volume falling to 39.9m (-4% qoq, -18% yoy). The key culprit was equity index futures (- 4% qoq, -22% yoy) which had a weak start in Jan-Feb, but picked up in Mar. 
  • Average fee per contract was higher at S$1.20 (2QFY17: S$1.16) as it cut rebates for iron ore.
  • SGX gained market share in the China A50 (+2% pts), MSCI Taiwan (+6% pts), Nifty (+8% pts) and iron ore (+5% pts) futures contracts, though Nikkei 225 dipped 1% pt.

Maintain Add, with earnings recovery in sight 

  • SGX trades at 22x forward P/E, 0.5 s.d. below its historical mean despite securities ADVT picking up to a sustainable level of S$1.2bn. 
  • We like SGX for potential earnings recovery on the back of higher securities and derivatives market volumes, continued cost discipline, strong IPO pipeline and its cash pile for M&As. 
  • We maintain Add, with a higher target price of S$8.16 (24x FY18 P/E, its historical mean) as we tweak our FY17- 19F EPS. 
  • The stock offers a 4% yield
  • Key downside risk is lower market volumes.

Jessalynn CHEN CIMB Research | 2017-04-20
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.16 Up 8.090