SINGAPORE EXCHANGE LIMITED
S68.SI
Singapore Exchange Ltd (SGX SP) - Negative Development For Indian Product Suite
Termination of licensing agreements and data
- The three Indian bourses (National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange of India (MSEI)) announced they will terminate licensing agreements for their indices and data with foreign exchanges/foreign trading platforms. SGX announced it will provide continuity solutions for clients (incl. developing solutions with NSE in Gujarat International Finance Tech (GIFT) city).
- The impact of the termination of the Nifty suite of derivative products will occur in about six months.
- Accordingly, we lowered FY18-20E net profits by ~1-3% on lower revenue, slightly offset by lower expenses.
- With the change in EPS, we lowered our Target Price 1% to SGD8.73, based on an unchanged P/E of 23x FY19E EPS, in line with its mean since 2012. Maintain BUY.
Nifty 50 futures will be affected the most
- Affected the most will be Nifty 50 futures, one of SGX’s key major contracts.
- SGX has a 52% market share for Nifty 50 in 2Q18 (higher than NSE’s 47% and CME’s 2%). As of FYTD18 (Jul’17-Jan’18) Nifty suite of products, MSCI India and MSCI India NTR index futures accounted for 12%/9% of SGX’s total derivatives vol/open interest, with the bulk from Nifty 50.
- Management has assured that the Indian single stock futures (SSF) will not be affected, as SSF are not under licensing arrangements.
Lowered derivatives volume by 3-9% for FY18-20E
- We believe SGX can potentially develop solutions to fill in the decline in derivatives volume from its Indian products, but remain conservative and cut derivatives volumes by 3-9% for FY18-20E (assumes zero volume from Indian products in FY19-20E). We have assumed the adverse impact on net profits will be partially offset by lower expenses, as SGX has previously demonstrated its ability to reduce costs when facing revenue headwinds.
- Our sensitivity analysis shows that for every 10% decline in our revised FY19E DDAV estimate, revenue in the equity derivatives and commodities businesses will decrease by 10-13%, ceteris paribus.
Maintain BUY
- Our revised Target Price of SGD8.73 is based on 23x FY19E P/E.
- SGX is a good proxy for the market cycle, with healthy FY18-19E ROEs of ~35% and yields of ~4%.
- Risks to our call: lower SDAV/DDAV, significant regulatory changes, potential market 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
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http://www.maybank-ke.com.sg/
2018-02-12
Maybank Kim Eng
SGX Stock
Analyst Report
8.73
Down
8.820
