Singapore Exchange - DBS Research 2018-01-22: Ride On Positive Momentum

Singapore Exchange - DBS Vickers 2018-01-22: Ride On Positive Momentum SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - Ride On Positive Momentum

  • Strong derivatives volume growth continues (10% q-o-q/ 18% y-o-y). 
  • Look forward to 2H18 with new products in pipeline, more listings, as well as new dual class shares on SGX. 
  • Base dividend of 5 Scts declared (unchanged y-o-y). 
  • Maintain BUY, Target Price raised to S$8.90.

Maintain BUY; Target Price of S$8.90. 

  • We reiterate our positive view on Singapore Exchange (SGX) given improved sentiment on the market, and higher volumes for both equities and derivatives businesses. We expect SGX’s earnings to grow by 4-11% going forward, after a relatively weak FY 2017. 
  • SGX’s continued efforts to drive market liquidity and new product initiatives should bear fruit in the coming years. 
  • SGX’s PE valuation discount to Bursa Malaysia (25x FY18F PE) and Hong Kong Exchange (42x FY18F PE) has also widened and is now relatively cheap at 21x FY19F PE, -1SD of its mean, the lowest in recent years.

Where we differ: 

  • We are more positive on the Singapore market activity for both securities and derivatives. Our earnings forecasts are more bullish than consensus by 3-6% across FY18- 20F on stronger revenue assumptions driven by improved market activity in light of better market sentiment. 
  • We believe that derivatives revenue will continue to bolster SGX’s earnings.

Potential catalysts: 

  • New derivative product launches, potential structural changes to boost liquidity in the Securities market, and earnings accretive M&A are potential catalysts for the stock.

Key Risks to Our View

  • Slower-than-expected market activity could derail revenue traction. Derivatives, a growing revenue generator, could be at risk if products do not generate sufficient trading volumes.
  • Lower fees are also a key risk to revenues.

WHAT’S NEW - Ride on positive momentum 


  • Revenue driven by derivatives in 2Q18, a more exciting 2H18 awaits. 2Q18’s revenue was driven largely by growth in derivatives revenue with NPAT coming in flat largely due to higher operating expenses. 
  • Going forward, we expect 2H18 to see broad-based growth from all segments on increased activities for both the securities market as well as derivatives businesses. New products and more listings are expected in 2H18, compared to 2H17, which should also help to bolster revenues and earnings.

Double-digit derivatives revenue growth on strong volumes.

  • Derivatives revenue grew to S$83.3m (+11.2% y-o-y, +3.4% q-o-q) mainly on the back of higher volumes as total volumes increased to 48.6m contracts (+17.3% y-o-y, +0.1% q-o-q). Increase in volumes was mainly due to higher volumes in SGX Nifty 50, FTSE China A50, Nikkei 225 and MSCI Singapore futures, which were offset by lower volumes in Iron Ore. 
  • SGX continued to maintain market leadership in the various derivatives markets, particularly seeing stronger market share across virtual steel mill value chain and its key FX pairs.
  • Average fee per contract was 8% lower y-o-y at S$1.07 as trading members contributed to a large portion of growth in volumes.

Increased activities in securities market. 

  • Securities revenue was largely flat at S$51.8m. Daily average traded value (SDAV) at S$1.2bn (+4.2% y-o-y, -2.2% q-o-q) was driven mainly by other products (ex-equities) which saw 41.7% growth in traded value. Average clearing fee was lower at 2.93bps compared to 2.97bps a year ago due to a shift in mix of products. Turnover velocity was 36% in 2Q18 (1Q18: 37%).
  • Lowered cost guidance. Operating expenses grew 5.0% y-o-y to S$102.1m for 2Q18, driven by technology expenses and staff costs. Going forward, management has reduced the cost guidance by S$15m to S$410-420m and remains committed to maintaining cost discipline.

Establishing Euro Medium Term Note Programme.

  • Accordingly, SGX intends to establish EMTN of c.S$1-2bn to provide flexibility for growth, either organically or inorganically. Potential areas of growth could be in currencies, commodities, fixed income products or technology-related.
  • We have not included any increase in debt in our current forecasts.

Other developments 

 New products in pipeline to expand offerings. 

  • As SGX continues to acquire more institutional clients for derivatives, new products will be introduced going forward. SGX is expected to launch new Indian Single Stock Futures (SSFs) in February 2018, broadening its India suite on the back of strong client demand for additional risk management tools.
  • SGX is also working on its FX suite, which has achieved commendable results thus far having seen USD/CNH volumes grow 190% y-o-y and INR/USD volumes grow 66% y-o-y on the back of attaining dominant market shares (USD/CNH: 75%, INR/USD: 45%).

New Dual Class Shares (DCS). 

  • SGX will be implementing DCS with rules expected to be out in 1HCY18. Alongside increased IPO listing pipelines for 2H18, the first Dual Class Shares listing is also expected to be launched soon after the rules are finalised. We believe the implementation of DCS will improve SGX’s competitiveness as a leading exchange and increased IPO listings expected in 2H18 should bode well for market activity.

Fixed income trading ramps up. 

  • Since the establishment of SGX BondPro, there are currently > 100 customers and fixed income trading is expected to surpass US$1bn, continuing to add to securities revenues.


Maintain BUY, Target Price of S$8.90. 

  • We revised our Target Price upwards from S$8.40 to S$8.90 as we roll over valuation base to FY19F on higher earnings (+2%) as we raised derivatives volume assumption on the back of new product offerings and growing client base. 
  • Our Target Price is based on the dividend discount model, implying 21x FY19F PE. 
  • Dividend yield at current share price is c.4%.

Singapore Research DBS Vickers | Sue Lin LIM DBS Vickers | http://www.dbsvickers.com/ 2018-01-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 8.90 Up 8.400