Singapore Exchange - CIMB Research 2017-10-25: 1QFY18 Thriving Market Activity, Falling Fees

Singapore Exchange - CIMB Research 2017-10-25: 1QFY18: Thriving Market Activity, Falling Fees SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - 1QFY18: Thriving Market Activity, Falling Fees

  • Singapore Exchange's 1QFY6/18 net profit of S$91m (+9% yoy, +6% qoq) was within our/consensus expectations and accounts for 27% of our full-year forecast.
  • Average fee per contract for both securities and derivatives fell, but stronger traded volume of both products made up for 2% and 14% yoy revenue growth, respectively.
  • Opportunities that lie ahead for SGX include improving market sentiment, new asset classes, steady IPO pipeline and diversified geographical growth.
  • Maintain Add with a higher TP of S$8.21, pegged to historical mean of 24x FY19 P/E. 
  • 1Q18 DPS of 5Scts is within our expectations. The stock offers a decent 4% yield.

1QFY18 recorded positive 2% JAW 

  • SGX reported a higher 1QFY18 revenue of S$204m, thanks to growth across equities and fixed income (+2%), derivatives (+14%), as well as market data and connectivity (+10%). Operating expenses crept up slightly by 5% to S$98.5m (ex-Baltic, S$95.2m), with plenty of leeway to reach the lower end of the S$425m-435m cost guidance. 
  • Overall 1QFY18 net profit saw yoy and qoq improvements, forming 27% of our full-year number.

Positive SDAV momentum offsets lower average clearing fee 

  • Average clearing fee for equities remains under pressure, falling from 1QFY17’s 3.00bp to 2.87bp (FY17: 2.82bp), attributable to
    1. higher mix of ETFs and warrants, and
    2. higher proportion of trading from market makers and liquidity providers (MM/LP). 
  • The bright spot was in higher SDAV of S$1.16bn, up 18% from a year ago. 
  • We believe such growth is sustainable, underpinned by improving sentiment in the property, industrials, technology and finance sectors.

Still a beneficiary of growing Asian derivatives business 

  • A combination of product mix changes and increasing competition led to lower average fee per contract of S$1.13 in 1QFY18 (1QFY17: S$1.18). 
  • Nevertheless, SGX still enjoys a dominant position as a regional derivatives exchange, as evidenced by
    1. 15% yoy growth in derivatives volume,
    2. stronger average month-end open interest, and
    3. improving market share vs. peers in the key contracts (China A50, Nifty 50, iron ore etc.) 

Multiple growth opportunities ahead 

  • Apart from continuing momentum in market volatility, management seeks organic growth via a three-pronged approach:
    1. offering new asset classes that are adjacent to existing ones (e.g. varied index futures),
    2. expanding global distribution network (e.g. new Chicago office), and
    3. potential collaboration with other exchanges (e.g. recent partnership with Nasdaq). 
  • We also think the positive development of domestic regulations could make SGX a more favourable trading platform, vs its regional peers.

Maintain Add with a higher FY18-20F EPS and TP 

  • We raise our FY18-20F EPS by 1.4-2.2%, as we adjust for lower average fee for both securities and derivatives, but higher traded volume. 
  • Our target price is now higher at S$8.21, pegged to 24x FY19 P/E (historical mean); reiterate Add. 
  • Potential catalysts for the stock are synergistic M&As and macro uncertainties, while downside risks could stem from market switching to risk-off mode.

NGOH Yi Sin CIMB Research | 2017-10-25
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.21 Up 8.040