SGX - RHB Invest 2017-06-20: Broad-Based Growth Expected In FY18

SGX - RHB Invest 2017-06-20: Broad-Based Growth Expected In FY18 SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Broad-Based Growth Expected In FY18

  • For 4QFY17, QTD SADV of SGD1.15bn was relatively unexciting, in our view. However, we believe the strengthening global growth would be positive for Singapore’s economic growth, and would drive FY18F SADV to SGD1.35bn. 
  • We also remain hopeful of a surge in trading volume for the China A50 Index Futures, driven by lag effect from the Dec 2016 implementation of the Shenzhen-Hong Kong Stock Connect. 
  • Our BUY recommendation is unchanged as we fine-tune our TP to SGD9.00 (from SDGD9.10, 23% upside). SGX provides a decent dividend yield of 4.1%.

We are forecasting FY18 securities average daily volume (SADV) of SGD1.35bn. 

  • 4QFY17 QTD SADV of SGD1.15bn was marginally weaker than 3QFY17’s SGD1.19bn, but we believe trading value could pick up with global growth strengthening going forward, supporting Singapore’s economy as well.
  • Earlier this week, SGX and ETPL, the commercialisation arm of the Agency for Science, Technology and Research (A*STAR), signed a memorandum of understanding (MOU) to help start-ups and small and medium-sized enterprises (SMEs) tap into innovative technologies and capital more efficiently. Though the impact would flow-through in the longer term, we see this as SGX’s continued strive to drive its revenue.

Hopeful of a surge in China A50 Index Futures’ trading volume. 

  • The China A50 Index Futures’ trading volume surged in 2Q15, some 6-8 months after the Nov 2014 commencement of the Shanghai-Hong Kong Stock Connect. Following the commencement of the Shenzhen-Hong Kong Stock Connect in Dec 2016, there has not been any significant volume pick-up thus far, but we believe the upside potential remains.
  • Total derivatives trading volume was 28.3m in Apr and May 2017, which was flat YoY. 39% of the volume came from the China A50 Index Futures. 
  • We have forecasted FY17 derivatives average daily contract (DADC) of 683,000, which is close to FY17’s 11-month DADC of 671,000. 
  • We are forecasting FY18 DADC of 794,000, with across-the-board growth, particularly from the China A50 Index Futures.

SGX remains attractive. 

  • We forecast FY18 net profit growth of 12%, from both the securities and derivatives businesses. 
  • We peg our Target Price to a target FY18F P/E of 24x (1SD above the 2-year mean of 22.6x), which gives us a Target Price of SGD9.00. Our Target Price is supported by our DCF-derived fair value of SGD8.79.
  • Note that SGX’s FY17F dividend yield of 4.1% is attractive, compared with the sovereign 10-year bond yield of 2.1%. 
  • 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 | 2017-06-20
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.00 Down 9.100