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

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.

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.

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.

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.

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.

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