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

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.

2QFY18 results. 

  • 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.

2QFY18 securities average daily value (SADV) of SGD1.14bn was a mild 5% higher y-o-y, and down 2% q-o-q. 

  • 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.

SGX remains attractive. 

  • 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 | 2018-01-22
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.000 Same 9.000