Singapore Exchange - DBS Research 2019-04-26: Awaiting Catalysts

SINGAPORE EXCHANGE LIMITED (SGX:S68) | SGinvestors.io SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Awaiting Catalysts

  • Singapore Exchange's record derivatives revenue buffers lower equities performance. 
  • Awaiting resolution with National Stock Exchange (NSE) over India derivatives products. 
  • Quarterly dividend of 7.5 Scts declared (3Q18: 5 Scts). 
  • Maintain HOLD, Target Price S$7.05. 



No visible catalysts for now, maintain HOLD call, Target Price of S$7.05.

  • While SINGAPORE EXCHANGE LIMITED (SGX:S68) continues to deliver record derivatives performance in the last few quarters, slower equities business continues to weigh on Singapore Exchange’s profits. In addition, we believe potential competition from Hong Kong Exchange (HKEX)’s recently announced plans to launch a new MSCI China A Index futures would cap SGX’s share price in the near term arising from concerns of potential earnings downside.
  • That said, the impact of this development remains to be watched and may not be as dire should the market growth be buoyant enough for additional player(s).
  • We believe SGX’s share price should find support from its absolute dividends of 30 Scts/year, implying a c.4% yield.


Where We Differ:

  • Our earnings are lower than consensus by 4%/3% for FY20F/FY21F as we have lower growth assumptions (c.7% y-o-y) for derivatives contracts post FY19F. We have yet to input potential market share loss to HKEX’s MSCI China A Index futures in our numbers.


Potential Catalysts:

  • A delay in HKEX’s MSCI China A Index futures contracts launch, or failure for HKEX to obtain regulatory approval, may be stock catalysts for Singapore Exchange. Higher-than-expected growth in securities daily average value (SDAV) is also a re-rating catalyst.


Valuation:

  • Maintain HOLD and Target Price of S$7.05.
  • We derive our Target Price of S$7.05 based on the dividend discount model (k=8%, g=4%, ROE=33%), implying c.20x FY20F PE.
  • Although PE valuation is at -1SD (five-year average), we believe there are no visible catalysts for Singapore Exchange now and maintain our HOLD call.


Key Risks to Our View:

  • Competition in derivatives business. Singapore Exchange may see potential earnings downside should it face competition from HKEX which announced in March 2019 that it is planning to launch futures contracts. These may compete with Singapore Exchange’s FTSE China A50 Index Futures, which account for c.40% of Singapore Exchange’s total derivatives volume.


WHAT’S NEW - Record derivatives revenue buffers lower equities performance


Record derivatives revenue buffers lower equities performance.

  • Singapore Exchange's 3Q19 revenue of S$228m (+2.9% y-o-y, +2.1% q-o-q) continued to be driven by exceptional growth in derivatives revenue (+31.6% y-o-y, +5.5% q-o-q) on record derivatives volumes, buffered by lower equities performance which saw revenue shrink 29.8% y-o-y/4.0% q-o-q on the back of lower SDAV of S$1.0bn (-30% y-o-y, +4% q-o-q).
  • Expenses were still in line with guidance of S$445-455m for the full year. As a result, 3Q19 net profit improved to S$100m (+3.3% y-o-y/-0.8% q-o-q).

Record derivatives volumes.

  • Derivative volumes crossed 1m contracts for the first time with average daily trading volume improving 13.5% y-o-y/4.6% q-o-q as Singapore Exchange continues to see higher trading volumes across key equity index contracts, record FX futures volumes, strong growth in commodities futures especially Iron Ore derivatives due to supply disruptions across the world which led to price volatility.
  • Average fee per contract increased from $1.06 to $1.11 due to shift in mix of contracts as well as lower rebates.

Continues to see higher collateral management income, contributing to overall derivatives revenues.

  • Singapore Exchange continued to see strong growth in collateral management income on the back of higher open interest from strong institutional demand, which was attributed to strong growth in open interest for Net Total Return (NTR) futures as well as A50 futures. Collateral management, licence, membership and other revenues grew 61.9% y-o-y to S$45m in 3Q19.


Other developments


Management stresses on bigger market for A50 futures contracts.

  • There were several questions raised as to whether Singapore Exchange would go down to competing for volumes by being more price competitive.
  • We note that management repeatedly stresses its stance that a bigger market, should HKEX launch its A50 futures contracts, would benefit Singapore Exchange in terms of higher absolute volumes. Notably, since the announce in March 2019, March saw its highest contract volumes for A50 futures in close to four years at c.11m.


Awaiting resolution with NSE over India derivatives products.

  • According to Singapore Exchange, NSE and Singapore Exchange have jointly agreed on a proposal and have submitted the proposal to the two regulators respectively. We believe that the current market price has largely priced in the continual trading of Nifty suite of products between the two parties as we await more details of the proposal to determine if there will be earnings impact for Singapore Exchange.
  • Introducing more products. As the NTR suite continue to draw more interest with S$27bn notional outstanding currently, Singapore Exchange will continue to expand the suite of products to cater to the passive investing community. Singapore Exchange will also be introducing new options on rubber contracts as it continues to build its commodities franchise.


Valuation and Recommendation

  • Better equities performance would be a strong catalyst to SGX’s share price. 3Q19’s SDAV of S$1.0bn was down 29.5% y-o-y due to 3Q18’s high base (record SDAV since 4Q13), albeit improving from the preceding two quarters.
  • Should market sentiment turn more buoyant with an increasing number of market participants, higher SDAV would be a strong catalyst to SGX’s share price.

Maintain HOLD, Target Price of S$7.05.

  • We derive our Target Price of S$7.05 based on the dividend discount model (k=8%, g=4%, ROE=33%), implying c.20x FY20F PE.
  • Although PE valuations is at -1SD (five-year average), we believe there are no visible catalysts for Singapore Exchange now and maintain our HOLD call.





Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-04-26
SGX Stock Analyst Report HOLD MAINTAIN HOLD 7.050 SAME 7.050



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