SGX - RHB Invest 2018-01-22: Strength From Derivatives

SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Strength From Derivatives

SGX’s 2QFY18 net profit was flat y-o-y. SADV stood at SGD1.14bn, 5% higher y-o-y. Derivatives revenue surged a strong 11% YoY and contributed 41% of total revenue.
We remain bullish on SGX, with the expectations of continued SADV strength. We also assume FY18 SADV of SGD1.20bn, and a stronger FY19 SADV of SGD1.39bn, on the back of bullish investment sentiment from stronger economic growth.
The company’s plan to launch the Indian single stock futures and dual class share scheme are positives.

We maintain our FY18 and FY19 earnings forecasts and Target Price of SGD9.00 (13% upside), which is pegged to 24x FY19F P/E (1SD above its 3-year mean of 22.7x). Maintain BUY.

Singapore Exchange (SGX) reported 2QFY18 (Jun) net profit of SGD88.4m, up 0.1% y-o-y. 1HFY18 net profit of SGD179m represents 48% of our FY18 net profit forecast of SGD373m.
2QFY18 revenue rose a mild 3% y-o-y. However, staff and technology costs increase led to operating expenses rising 5% y-o-y. Operating profit margin of 50% was thus 1ppt lower y-o-y.

The average equities clearing fee was 2.93bps, a decrease from 2QFY17’s 2.97bps due to a higher proportion of trading from market makers. Consequently, securities trading and clearing fees were down 1% y-o-y and accounted for 25% of total revenue.
Post-trade services revenue fell 15% y-o-y due to contract processing revenue decline – contract processing would be performed by brokers as they continue to migrate to their own back office systems by end-3QFY18.

We forecast FY18 net profit growth of 9.7%. We use a target 24x FY19F P/E (1SD above the 3-year mean of 22.7x), which yields a Target Price of SGD9.00. Our Target Price is supported by a DCF-derived fair value of SGD8.85.
Our sensitivity analysis shows that even if FY19F SADV was lower by 20% at SGD1.11bn, SGX should trade at around SGD7.84.
The company also offers an attractive FY18F dividend yield of 3.9% (FY17: 3.5%), which is higher than the Singapore sovereign 10-year bond yield of 2.07%.
SGX declared an unchanged interim dividend of SGD0.05/share. Maintain BUY.
The key risks to our recommendation include global economic and geo-political developments.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-22

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.000 Same 9.000