Singapore Exchange - RHB Invest 2018-12-14: Bullish On Derivatives Strength


Singapore Exchange - Bullish On Derivatives Strength

  • Maintain BUY with SGD8.20 Target Price – pegged to 22x FY20F EPS – granting 16.6% upside. FY19F dividend yield is also an attractive 4.5%.
  • We forecast FY19 SADV of SGD1.11bn, slightly above the 5MFY19 SADV of SGD1bn.
  • We are bullish on derivatives volume numbers, as the China A50 Index Futures saw October & November daily average contracts traded surging 16% vs 1QFY19 – and we believe the strength can persist, on the back of continued market volatility.

Recent weak securities average daily value (SADV), but we believe there will be some pick-up.

  • For the first two months of 2QFY19 (Jun), Singapore Exchange (SGX) recorded SADV of SGD1bn, which is 5% lower vs 1QFY19’s numbers.
  • Despite the 10 Dec reduction of the settlement cycle to two days from three – which could dampen trading – we remain optimistic that SADV can pick up from current levels in subsequent months. This is as institutional investors switch equities within their portfolios on global developments such as interest rate hikes (eg less aggressive stance recently in the recent 28 Nov Federal Reserve chairman speech) and trade war prospects.
  • SGX’s launch of the single stock daily leverage certificates in November is also a catalyst to grow revenue.

China A50 Index Futures – star contributor.

  • For October, the China A50 Index Futures traded stood at 9.4m contracts vs 1QFY19’s monthly average of 7.84m. The derivatives trading momentum remains good, with the China A50 accounting for 43% of total derivatives volume share.
  • We forecast FY19 derivatives average daily contracts of 845,000 vs 1QFY19’s 861,000.

Higher interim dividend.

  • An interim dividend of SGD0.075 was paid on 5 Nov. This was higher than the SGD0.05 paid out in 1QFY18.
  • SGX is on track to hit our target FY19 dividend of SGD0.31.

Strong balance sheet.

  • SGX remains in a net cash position, with a monopoly over the trading of Singapore-listed equities.

Limited downside, even if SADV is lower than our base case.

  • Our Target Price of SGD8.20 is pegged to 22x FY20F P/E, which is the 4-year mean. Our base case FY20F SADV is SGD1.29bn. Even if the latter was 20% lower than our base case of SGD1.03bn, SGX’s hypothetical fair value of SGD7.21 is close to the current traded price.
  • Key risks would be global economic fluctuations and geopolitical developments.
  • Another area investors should monitor is the SGX-India Index Services & Products arbitration process, which has been deferred pending the outcome of discussions between SGX and the National Stock Exchange of India on a potential collaboration.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
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