Singapore Exchange - CIMB Research 2018-04-20: 3QFY18 Stellar Quarter

Singapore Exchange - CIMB Research 2018-04-20: 3QFY18 Stellar Quarter SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange - 3QFY18 Stellar Quarter

  • SGX’s 3QFY18 was its best performing quarter in the last 10 years, led by higher SDAV (+17% y-o-y) and derivatives volume (+34% y-o-y).
  • 3QFY18 core net profit of S$100m was in line with our/consensus expectations, registering y-o-y and q-o-q growth of 15.5% and 13.7%, respectively.
  • We expect market volatility to remain as a near-term driver for SGX, while its mediumterm prospects could benefit from new products and initiatives.
  • Upgrade from Hold to ADD with a higher S$8.20 Target Price as we see Nifty overhang subsiding and market activity improving. It also offers 3-4% forecasted dividend yield.

Highest quarterly net profit in the past 10 years 

  • SGX reported 3QFY18 core net profit of S$100m (+15.5% y-o-y, +13.7% q-o-q); 9MFY18 results formed 77%/75% of our/consensus full-year numbers. It also recorded the highest quarterly revenue of S$222m since listing, thanks to strong growth in both securities and derivatives trading. 
  • Despite higher staff costs (11.2% y-o-y), we saw better 3Q18 operating margin (53% vs. 2Q18’s 50% and 3Q17’s 51%). 
  • Interim DPS was unchanged at 5 Scts.

Equities and fixed income revenue up 5% y-o-y 

  • SGX’s persistent efforts to reach out to investors and showcase its companies seem to be paying off, as its securities daily average traded value (SDAV) surged to S$1.45bn (2Q18: S$1.14bn, 3Q17: S$1.24bn), helped by increased participation from market makers and liquidity providers (MM/LPs). 
  • Average clearing fee hence fell from 2.80bp to 2.71bp. More equity listings and funds raised (S$1.8bn vs. S$0.3bn a year ago) contributed to the 8% y-o-y improvement in issuer services.

SGX still a key risk management centre 

  • In 3QFY18, we saw growth across all key equity index contracts (commodities volume down due to lower volatility), resulting in 20% higher derivatives revenue. 
  • Apart from increasing YTD bond listings, gains in volume market share for FX futures (+17% for USD/CNH, +5% for INR/USD) also underscore SGX’s efforts to build on its multi-asset offering, and retain its leading market position as a derivatives exchange.

Successor India Nifty products could minimise licensing disruption 

  • SGX announced earlier its plans to launch new India equity derivative products in Jun 18, based on a reference value methodology using publicly available prices of futures contracts. 
  • Its constant engagement and consultation with existing market participants on the successor products give us confidence that there should be a seamless transition and minimal earnings disruption upon the licensing expiry in Aug 18.

Upgrade to ADD on higher market activity and EPS 

  • As we raise our FY18-20F EPS by 2.2-4.5% on the back of higher SDAV and derivatives contracts’ assumptions, our target price increases to S$8.20 (still pegged to 24x FY19F P/E, its historical mean). 
  • SGX’s share price has retraced from its peak of S$8.49 after news of the licensing suspension. We now upgrade from Hold to ADD, as we see earnings improvement from higher market activity, and rollout of new initiatives and products. 
  • The stock also offers FY18-20F dividend yields of 3.8-4.1%.

Key catalysts and risks 

  • Greater traction in new products and synergistic M&As are key potential catalysts; downside risks could stem from rising competition from regional exchanges, and the market returning to risk-off mode.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-04-20
SGX Stock Analyst Report ADD Upgrade HOLD 8.20 Up 7.850