SGX - OCBC Investment 2019-01-25: Record Derivatives Revenue


SGX - Record Derivatives Revenue

  • Derivatives is the star.
  • Volatility will favor Derivatives.
  • Fair value of S$7.98.

Record Derivatives revenue

  • SINGAPORE EXCHANGE LIMITED (SGX:S68) delivered a slightly better than consensus 2QFY19 report card, with net earnings of S$96.5m, +9.2% y-o-y and +6.0% q-o-q, versus consensus expectations of S$95.8m.
  • Derivatives was the star performer as it now accounted for 50% of group revenue and generated 35.4% y-o-y and 15.5% q-o-q increase in revenue to S$112.9m – the second consecutive quarter of record revenue. To be expected, Equities & Fixed Income fell 12.3% y-o-y to S$85.6m, and accounted for about 38% of revenue now, versus 48% a year earlier.
  • A 2Q dividend of 7.5 cents was declared, bringing the first half dividend payout to 15 cents (versus 10 cents a year ago).
  • As previously guided, management maintained its full year guidance of operating expenses of S$445m to $455m with technology-related capital expenditure at S$60m to $65m.

High expenses in 2H; volatility will create opportunities

  • Based on management’s full year guidance for operating expenses and 1H total expenses of S$213m, this means that operating expenses will go up in 2H to around S$232m to S$242m, higher by about S$19m to S$29m.
  • With lingering market concern over the on-going trade war, cut in economic growth forecasts and the potential impact on corporate earnings and outlook, volatility and risks will remain this year. Management expects this to create more opportunities for market participants to demand risk management solutions, which will in turn benefit its derivatives business.
  • In line with this, we have raised our Derivatives revenue projection for this year to S$444m or 50% of group revenue, with 39% from Equities & Fixed Income and the balance 11% from Market Data & Connectivity.

Stock has done well since last report

  • Since our last report on 22 Oct 2018 (see report: SGX - Derivatives Outpaced Equity) when we called for a BUY on the stock at S$6.93 (which gave a dividend yield of 4.3% based on management’s commitment to pay out full year dividend of 30 cents or a quarterly dividend of 7.5 cents per quarter), SGX’s share price has done well. At the current price of S$7.50, the stock has appreciated 8.2%.
  • With our revised earnings estimate for FY19 and based on the same 22x FY19/20 earnings projections, our fair value estimate for the stock is raised slightly from S$7.96 to S$7.98. Current dividend yield is 4.0% based on S$7.50.

Carmen Lee OCBC Investment Research | 2019-01-25
SGX Stock Analyst Report BUY MAINTAIN BUY 7.98 UP 7.960