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.

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).

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 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).

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.

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 | http://research.itradecimb.com/ 2018-01-19

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 8.50 Up 8.210