Singapore Exchange - RHB Invest 2019-04-05: Derivatives Still In Driver’s Seat; Keep BUY

SGinvestors.io

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Derivatives Still In Driver’s Seat; Keep BUY

• Still a BUY with lower SGD8.10 Target Price from SGD8.20, pegged to 23x FY20F (Jun) P/E, offering 9% upside plus 4% FY19F yield.
• Singapore Exchange's 3QFY19 securities average daily value (SADV) declined 31% y-o-y to SGD0.97bn. We lowered our FY19F SADV to SGD1.04bn from SGD1.07bn, which is slightly above the 9MFY19 SADV of SGD0.99bn.
• Our FY20F SADV assumption has been lowered to SGD1.12bn from SGD1.29bn – we expect global stabilisation to drive FY20F SADV higher y-o-y. 

Derivatives volume numbers have been robust

• Derivatives volume numbers have been robust recently, as seen in the China A50 Index Futures’ Jan-Feb 2019 contracts traded that rose 8% y-o-y. We believe market volatility will keep derivatives volume firm, though we have conservatively assumed FY19F derivatives average daily contract (DADC) of 924,000 vs 8MFY19’s 941,000 although still higher than FY18’s 795,000.
• We have also assumed lower y-o-y FY20F DADC on expectations of slower China A50 Index Futures trading with HKEx’s expected launch of the MSCI China A Index Futures. 

Awaiting more details on NSE and SGX agreement.

• On 1 Apr, a Bloomberg newswire report highlighted that the National Stock Exchange of India (NSE) and Singapore Exchange have reached a finalised agreement to trade Nifty products – this reduces uncertainty, in our view.
• We are awaiting more details from Singapore Exchange, which should provide some feel on the earnings impact. 

Minor fine-tuning of our FY19F profit estimate

• Minor fine-tuning of our FY19F profit estimate, with more significant cuts to our FY20F and FY21F net profit.
• We lowered our FY19F net profit by 0.2% as we cut our FY19F SADV assumption to SGD1.04bn from SGD1.07bn, but largely offset by our higher FY19F DADC assumption of 924,000 from 897,000. Our FY20F-21F net profit forecasts are cut by 8% and 6% on lower SADV assumptions. 

Respectable dividend yield.

• SINGAPORE EXCHANGE LIMITED (SGX:S68) is on track to hit our target SGD0.31 DPS for FY19F, which translates to a yield of 4% - this is higher than the Singapore sovereign 10-year yield of 2.08%. 

Strong balance sheet.

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

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

• Our Target Price of SGD8.10 is pegged to 23x FY20F EPS, ie the 4-year mean.
• Hypothetically, if FY20F SADV was 20% lower than our base case at SGD0.90bn, Singapore Exchange’s fair value would be SGD7.18, close to the current traded price. 
• Key risks are global economic fluctuations and geopolitical developments. 

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-05

SGX Stock Analyst Report BUY MAINTAIN BUY 8.10 DOWN 8.200