Singapore Exchange - CIMB Research 2018-01-19: 2QFY18 Beyond Dual Growth Engines

Singapore Exchange - CIMB Research 2018-01-19: 2QFY18 Beyond Dual Growth Engines SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - 2QFY18 Beyond Dual Growth Engines

  • SGX's 1HFY6/18 net profit of S$179m (+4.5% y-o-y) accounted for 51%/49% of our/ consensus full-year forecasts.
  • Securities ADVT saw a slight uptick to S$1.14bn, with a greater mix of lower-yielding products (e.g. structured warrants, ETFs).
  • Derivatives traded volume rebounded strongly (+18% y-o-y, +5% q-o-q) in 2QFY18 though average clearing fee was a slight disappointment.
  • We expect SGX to benefit from a healthy IPO pipeline, increasing market activity and new initiatives, hence we raise our FY18-20F EPS by 3-3.5%.
  • Maintain ADD with higher Target Price of S$8.50 (24x FY19F P/E), and 3-4% dividend yield.

1HFY18 results in line; FY18 cost guidance lowered 

  • SGX reported 2QFY18 net profit of S$88.4m, which formed 25%/24% of our/consensus full-year numbers. 
  • Topline growth (+3% y-o-y, stable q-o-q) was driven by derivatives trading volume as it was a seasonally-weak quarter for securities. 
  • Operating expenses (+5% y-o-y) were kept in check with 1H18 cost-to-income ratio steady at 49%. 
  • SGX lowered its FY18 cost guidance to S$410m-420m, from S$425m-436m previously, and also declared an interim DPS of 5Scts (unchanged).

Securities ADVT up 4% y-o-y 

  • SGX's 2QFY18’s SDAV improved from S$1.09bn to S$1.14bn, on the back of higher STI index (+18% y-o-y) and market capitalisation (+14% y-o-y). 
  • Average clearing fee fell to 2.75bps (2QFY17: 2.86bps) due to a greater mix of lower-yielding products like structured warrants, but was better than 1QFY18’s 2.70bps as there was less trading from market makers and liquidity providers (MM/LP). 
  • The S$2.1m shortfall in contract processing revenue was expected, as 20 brokers have completed migration to their in-house system.

Derivatives traded volume recovered on higher volatility 

  • Derivatives revenue came in at S$83.3m in 2QFY18, thanks to growing volumes (48.6m contracts, +18% y-o-y), which offsets the lower average fee per contract of S$1.07 (vs.
  • S$1.16 prev.) due to increase in volumes from trading members. Higher activity was particularly evident in China A50 futures, Nikkei 225 futures and MSCI Singapore futures.
  • We expect derivatives to remain a key growth driver for SGX, as they expand their equity index (new Indian single-stock futures) and commodities products (full steel suite).

Other key initiatives to watch for 

  • Apart from new product offerings, SGX will also be introducing a dual-class share structure by 1HCY18, with an initial focus on new economy companies. We also sense management’s optimism on the 2018 IPO pipeline, which could possibly overlap across different sectors. 
  • Fixed income trading is expected to exceed US$1bn; and an upcoming S$1bn-2bn medium term note (MTN) programme could come in handy for potential synergistic M&As, which could re-rate the share price further, in our view.

Higher Target Price of S$8.50 on higher EPS 

  • As we factor in sustainable growth momentum on market activity and positive sentiment, higher revenue from derivatives membership fee hike (w.e.f 2 Jan 18), and lower operating expenses, our FY18-20F EPS increased by 3.0-3.5%, leading to a higher Target Price of S$8.50, pegged to 24x FY19F P/E (historical mean). 
  • We continue to like the business but prefer to await a more attractive entry level. Our ADD rating is intact with the stock offering 3-4% forecasted dividend yield. 
  • Market returning to a risk-off mode is a key downside risk.

NGOH Yi Sin CIMB Research | 2018-01-19
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.50 Up 8.210