Singapore Exchange Ltd (SGX SP) - Maybank Kim Eng 2018-01-22: Multi-Asset Strategy On Track

Singapore Exchange Ltd (SGX SP) - Maybank Kim Eng 2018-01-22: Multi-Asset Strategy On Track SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange Ltd (SGX SP) - Multi-Asset Strategy On Track


1H18 in line; EPS and Target Price raised 

  • Singapore Exchange Ltd (SGX)'s 1H18 core PATMI of SGD179.1m (+4.5% y-o-y) was in line with our estimate at 49% of our previous FY18 forecast. The interim dividend of SGD0.05/sh was also in line with our expectation. 
  • We raised our FY18-20E EPS by 3- 8%, mainly due to higher derivatives revenue, partly offset by the decline in equities and fixed income revenue from lower post trade services. 
  • With the change in EPS, we raised our Target Price by 6% to SGD8.82, based on an unchanged P/E of 23x FY19E EPS, in line with its mean since 2012.


Positive catalysts 

  • We have turned more positive on SGX’s ability to generate higher derivatives volume because its volume market share for key contracts has been largely maintained and/or increased and it has expanded product offerings (launch of Indian single stock futures in Feb), including diversifying into FX products. 
  • We raise our DDAV (derivatives daily average volume) assumption by ~4-16% across FY18-20E, and expect a 3- year CAGR of ~16%. However, we lower average fee per contract by ~2% across FY18-20E as we think SGX is more likely to lower fees to defend market share from increasing competition; this follows the 8% y-o-y decline in average fee per contract in 2Q to SGD1.07 (2Q17: SGD1.16) due to more volumes from SGX trading members who enjoy lower fees.
  • Cost management was impressive in 1H18, and management guided to lower expenses of SGD410-420m for FY18E. We expect expenses to grow at a 3-year CAGR of ~5% from higher staff and technology costs.


Opportunities ahead 

  • SGX will allow companies with dual-class share structures to be listed, with rules expected to be unveiled by Jun 2018, followed by its first listing soon after. 
  • Expansion plans to accelerate growth could possibly include FX, commodities, and fixed income with a euro MTN programme of SGD1-2b by FY18E.


Cheaper than peers; maintain BUY 

  • SGX has high ROEs of ~35% and dividend yields of ~4% in FY18-19E. Despite this, it is trading at a ~45% discount (20.8x FY19E EPS) to 39.1x for regional peers. 
  • We believe SGX’s P/E valuation should revert to the mean of 23x from upside in a cyclical upturn although structural issues loom especially for its equities business. 
  • Risks to our call: lower SDAV/DDAV, significant regulatory changes/potential disruptors, competition and capital raising.


Swing Factors


Upside

  • Stronger-than-expected SDAV and derivatives daily average volume (DDAV).
  • Sizeable acquisitions or partnerships that can offer complementary or new product offerings to lift revenue.

Downside

  • Inability to price up due to competition from other exchanges and new entrants.
  • Capital-raising efforts to make large acquisitions could dilute ROEs.




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-22
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 8.82 Up 8.300



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