SGX - OCBC Investment 2019-04-26: Another Quarter Of Record Derivatives Revenue


SGX - Another Quarter Of Record Derivatives Revenue

  • Third quarter of record Derivatives revenue.
  • Expecting softer 4Q.
  • Lowering Fair Value to S$7.60.

Another record quarter for Derivatives

  • SINGAPORE EXCHANGE LIMITED (SGX:S68) posted a relatively flat set of 3QFY19 results. Revenue was up 2.9% y-o-y and 2.1% q-o-q to S$229m. Net earnings were also relatively flat at S$99.7m versus S$100.5m in the same period last year.
  • Derivatives revenue was the star performer for the quarter. Derivatives revenue rose 31.6% y-o-y or 5.5% q-o-q to S$119m – another record quarter or the third consecutive quarter of record revenue. This accounted for 52% of total group revenue. Equities and Fixed Income revenue now accounted for a smaller 36.6% of revenue, not surprising given the fairly lacklustre trading activity on the local market during the period under review.
  • Securities daily average traded value (SDAV) fell 30% to S$1.02b versus S$1.45b in 3QFY18.
  • A 3Q dividend of 7.5 cents was declared, same as the first 2 quarters. As previously guided, management maintained its full year guidance of operating expenses of S$445m to S$455m with technology-related capital expenditure at S$60m to $65m.

Softer 4Q

  • With the full year operating expense guidance of S$445m to S$455m, and based on 9-month actual total operating expenses of S$323.6m, even at the lower end of the guidance, total expense in 4Q is likely to be high at around S$121.4m versus the average of S$107.9m per quarter for the first three quarters. On this basis, we expect this to eat into 4Q projections.
  • While key equity markets indices have generally rebounded in the first four months of the year, we expect sentiment to turn more cautious now that valuations have become more expensive. This will be partly mitigated by volatility in the market which will in turn benefit the derivatives business.

Muted outlook; slightly lower FV

  • At a closing price of S$7.26 on 25 April 2019, and based on 30 cents dividend payout, the yield is 4.1%.
  • With the muted outlook, we are lowering our valuation from 22x earnings to 21x, and this lowers our fair value estimate from S$7.98 to S$7.60.
  • Downgrade from Buy to HOLD.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2019-04-26
SGX Stock Analyst Report HOLD DOWNGRADE BUY 7.60 DOWN 7.980