Singapore Exchange Limited - OCBC Investment 2018-06-01: No Longer Nifty, But Still Stable

Singapore Exchange Limited - OCBC Investment 2018-06-01: No Longer Nifty, But Still Stable SINGAPORE EXCHANGE LIMITED SGX: S68

Singapore Exchange Limited - No Longer Nifty, But Still Stable

  • Going solo.
  • Share price correction.
  • Fair Value lower to S$7.89.

Breaking up is hard to do…

  • In the last few months, the National Stock Exchange of India (NSE) has been battling with the Singapore Exchange (SGX) over Indian derivatives. This has taken a toll on SGX’s share price.
  • At the high this year, the stock was trading at S$8.50, but has since dropped to as low as S$7.10, down S$1.40 or 16.5%. In terms of market capitalization, this was stark as some S$1.5 billion were wiped off from its market capitalization.

Negatives have been priced in

  • As this continues to play out in the coming weeks, the outcome is unlikely to be clear, but the share price has clearly reflected most of the negatives and the potential hit on SGX’s bottomline, if the sharp decline in market capitalization is any indication. However, we are of the view that the correction is overdone and has more than priced in the potential hit on its earnings.

Re-focus on fundamentals

  • We are keeping our FY18 earnings largely intact, but have revised our FY19 earnings to take into account the potential hit to its derivatives business. At the last result (for 9-month FY18), derivatives accounted for about 40% of group revenue (versus the average of 30% from FY10- 17). For the same period, SGX delivered net earnings of S$292m to S$349m or an average of S$325m per year.
  • With fairly stable core earnings, a committed dividend payout of 28 cents per year, and at current price of S$7.24 as at 31 May 2018, this means a good dividend yield of 3.9% from a debt-free company.
  • With the adjustment to our FY19 forecasts, and using the same valuation of 23x earnings, our fair value estimate drops from S$8.22 to S$7.89.
  • (Maintain BUY)

Recent Events

9 Feb 2018

  • The National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India (MSEI) jointly released a statement on the commercial licensing of their indices and market data with a number of foreign exchanges and business partners. This included the following:
    • Shall not license/provide Indian Indices and/or the data including the price of Indian securities to any foreign exchange and/or trading platforms for trading or settling derivatives in any form in a foreign jurisdiction.
    • Shall not license/provide Market Data including prices of securities traded on the Exchange’s platform to:
      • any exchange or a trading or settling venue outside India, for trading or settling any products including derivatives
      • any Index Provider and /or its licensee, for creation of Indices or products based on such indices, which in part (weightage of 25% or more on Indian securities) or in full are based on prices of securities/indices listed in India or are benchmarked to Indian indices, which may be made available for trading or settling derivatives on any foreign exchanges and/ or trading platforms.
      • any licensee, either directly or through its subsidiaries/group entities or through a third party data vendor in any form or manner for the purpose of trading or settling derivative products on any foreign exchange and/or foreign trading platforms. Further, such licensee is also not permitted to use Market Data for issuance of overseas derivatives instruments and / or structured products on exchange traded derivative contracts on Indian securities traded on foreign exchanges and/ or trading platforms.

11 Feb 2018

  • SGX announced that it will take all measures to maintain orderly trading and clearing of SGX India equity derivatives. It shared that the licence agreement with NSE will ensure the continuity of listing and trading of SGX’s Nifty suite of derivative products till August 2018 at a minimum. In the announcement, SGX shared that it “will develop and launch new India-access risk management solutions to allow global participants in SGX India equity index family of derivative products, to execute their investment activities with continuity.”

11 Apr 2018

  • SGX announced that it will list new India equity derivative products in June 2018, to provide market participants with continuity and the ability to seamlessly transition their current India risk management exposures.

22 May 2018

  • SGX announced that it has been notified by the National Stock Exchange of India (NSE) of an application made in the Bombay High Court for an interim injunction on its new products.

29 May 2018

  • National Stock Exchange of India filed for an interim injunction against the launch of SGX’s new India derivatives products announced on 11 April 2018.
  • The Court has ordered the matter to be fixed for arbitration and for a decision on the injunction to be made by 16 June 2018.

Carmen Lee OCBC Investment | 2018-06-01
SGX Stock Analyst Report BUY Maintain BUY 7.89 Down 8.220