SGX - RHB Invest 2018-02-12: Impacted By Nifty 50 Index Futures Trading

SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Impacted By Nifty 50 Index Futures Trading

The announcement by India’s national stock exchanges to stop providing data feeds to foreign rivals – and eventually stop the trading of offshore derivatives tied to the country’s benchmark indices – would be a negative for SGX. This is the case as the SGX Nifty 50 Index futures account for 12% of total derivatives traded on the domestic bourse.
SGX has indicated that it would work on new product developments to help offset this adverse impact.
We are not adjusting our earnings, as we await more information from the company (over the next few months) on new products – we also maintain our BUY recommendation.

Nonetheless, we did a sensitivity analysis, which shows that a 10% fall in DADV could lower SGX’s fair value to SGD8.36 vs our current unchanged Target Price of SGD9.00 (14% upside).

They are to eventually halt the trading of offshore derivatives tied to the country’s benchmark indices, such as the Nifty 50. This is likely to have a negative impact on SGX, which offers the SGX Nifty 50 Index futures.
The company said that, for the Nifty 50 Index futures, it is to be business as usual till August. This is due to the 6-month notice period for termination under SGX’s licence agreement with India’s National Stock Exchange (NSE).
For 2QFY18 (Jun), the SGX Nifty 50 Index futures accounted for 12% of total derivatives traded volume of 48.63m during the quarter. The impact on FY18 financials is seen as limited, but would be felt more so from FY19 onwards. SGX said that it is working on new product development to help offset the negative impact from the halt of offshore trading of the Nifty 50 Index futures.
We are currently assuming FY19 derivatives average daily volume (DADV) of 0.821m, which gives our SGX Target Price of SGD9.00 (14% upside). This is pegged to our target P/E of 24x FY19F EPS, or 1SD above the 3-year mean of 22.7x.
Whilst we are not adjusting our earnings forecasts now, we have done a sensitivity analysis, which shows that a hypothetical 10% and 20% decline in DADV could lead to lower fair values of SGD8.36 and SGD7.71 respectively. We await more news from SGX on initiatives to grow the derivatives market, and believe that some of these efforts could offset the negatives.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-12

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.000 Same 9.000