Singapore Exchange (SGX) - RHB Invest 2018-06-22: Stronger SADV Expected In FY19 Market Cap

Singapore Exchange (SGX) - RHB Invest 2018-06-22: Stronger Sadv Expected In Fy19 Market Cap SINGAPORE EXCHANGE LIMITED SGX: S68

Singapore Exchange (SGX) - Stronger SADV Expected In FY19 Market Cap

  • Maintain BUY and SGD9 Target Price, pegged to FY19F P/E of 24x, offering 24% upside.
  • We are forecasting FY19 SADV of SGD1.39bn, which is higher than FY18’s YTD SADV of SGD1.23bn. Global news flow on US-China trade tensions and US Fed rate hikes could stimulate trading.
  • There is derivatives revenue risk from ongoing arbitration proceedings between SGX and IISL but the impact is expected to be relatively small as SGX Nifty 50 Index Futures accounts for only 11% of SGX’s derivatives traded volume.
  • Dividend yield is attractive at 4.3-4.9%.

Global developments could stimulate securities trading volume.

  • We forecast Singapore Exchange (SGX)'s FY18 securities average daily value (SADV) of SGD1.2bn, which is close to the FYTD’s SGD1.23bn. 
  • During 1 Apr 2018 to 18 Jun 2018, SGX recorded SADV of SGD1.26bn. Looking ahead, we are bullish on SADV, forecasting SGD1.39bn for FY19. 
  • Global developments such as the US Federal (Fed) funds rate (FFR) hikes could stimulate investors to switch their stock holdings and in turn generate stronger trading volumes, in our view.

Bursa-SGX link

  • We are also positive on the Bursa-SGX link, which was first announced in Feb 2018. However, in early June, Malaysia’s new Government indicated that it will relook at the plans. We await further updates on this.

Impact from SGX-IISL development seen to be relatively small.

  • The May 2018 derivatives average daily contracts (DADC) of 763,000 was weaker than 3QFY18’s 922,000 but our FY18 assumption is closer to the May 2018 number. Our FY19 DADC assumption of 821,000 factors in an adverse impact from Nifty 50 Index Futures trading – for 3QFY18, the SGX Nifty 50 Index Futures accounted for 11% of total derivatives traded volume.
  • In an announcement on 16 Jun 2018, SGX said that it was granted an extension for its licence to continue listing and trading of SGX Nifty contracts beyond Aug 2018, as part of the ongoing arbitration proceedings.

Good earnings growth and strong balance sheet.

  • We are forecasting FY19 net profit growth of 9.7%. SGX is in a net cash position and has a monopoly over the trading of Singapore equities.
  • Our Target Price of SGD9 is based on FY19 P/E of 24x (1SD above the 3-year mean of 22.2x). Our DCF valuation gives a supporting fair value of SGD8.85. Our sensitivity analysis shows that even if FY19 SADV was lower by 20% at SGD1.11bn, SGX would trade at around SGD7.84.
  • Dividend yield is high at 4.3%, higher than the Singapore sovereign 10-year bond yield of 2.57%.

Key risks are global economic fluctuations and geo-political developments.

  • The outcome of the arbitration between SGX and IISL could also impact future derivatives trading volume and hence earnings.

Leng Seng Choon CFA RHB Invest | 2018-06-22
SGX Stock Analyst Report BUY Maintain BUY 9.000 Same 9.000