Singapore Exchange (SGX) - CGS-CIMB Research 2019-04-25: 3QFY6/19 Pessimism Priced In


Singapore Exchange (SGX) - 3QFY6/19: Pessimism Priced In

  • Singapore Exchange's 3Q19 net profit of S$99.7m in line with consensus but slightly above ours. 
  • Stronger derivatives volume (China A50, iron ore, FX) and open interest offset the drop in SDAV. 
  • Maintain ADD, premised on derivatives growth and win-win Nifty outcome. 

SGX's 3Q19: Comparable y-o-y, Stronger q-o-q

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)’s 3QFY19 net profit of S$99.7m (flat y-o-y, +3.3% q-o-q) met consensus but was slightly above our forecast. Derivatives were still the key driver with 32% y-o-y growth, offsetting the 22% y-o-y decline in equities and fixed income revenue.
  • Additional headcount, roll-out of new projects and more marketing activities resulted in a 6% y-o-y rise in 3Q costs, which could climb further in 4Q19F.
  • An interim DPS of 7.5Scts (3Q18: 5Scts) was declared.

China A50, iron ore and FX contracts growing in strength

  • As Singapore Exchange’s A50 futures leverage on China’s internationalisation, its expanding product suite also benefits from regulatory impact and more passive investing.
  • FX contracts surged 48% to 5.4m, and we expect this to sustain (esp. for CNH and INR pairs), given Singapore’s rising prominence as Asia’s FX hub, complemented by its recent 20% stake acquisition in BidFX.
  • We also saw an uptick in average contract fee due to product mix changes and lower rebates.

Another record derivatives revenue; competitive concerns priced in

  • SGX's share price corrected c.10% on news of Hong Kong Futures Exchange (HKEX) partnering with MSCI to offer China A Index Futures. We believe such concerns have been more than priced in, given that
    1. the heavier weighting of Chinese shares in MSCI global benchmarks will grow market size and liquidity even for Singapore Exchange’s China A50 futures,
    2. any new product will take at least 2-3 years to ramp up, and
    3. Singapore Exchange’s first-mover edge and extensive offering have developed a sticky customer base.
  • We think increasing clarity on product specifications and Nifty resolution could ease the overhang on the stock.

SDAV +4.4% q-o-q, interest in capital-raising returns

  • Securities daily average traded value (SDAV) was 4.4% better q-o-q at S$1.02bn, though down 29.5% y-o-y from 3Q18’s S$1.45bn as equity investors remain cautious. Average clearing fees fell 0.04bp due to participation from market makers.
  • Management sees more bond listings and REIT offerings in the pipeline amid the low interest rate environment.

More attractive price level, maintain ADD with higher EPS

  • We raise FY19-21F EPS by 0.1-2.9% on higher derivatives volume and collateral management income. No change to our ADD call and S$7.90 Target Price (still pegged to 22.1x FY20F P/E which is 0.5 s.d. below historical mean) as we think the pending HKEX’s MSCI China futures launch has been priced in at 20.3x FY20F P/E and c.4% dividend yield.
  • Potential catalysts are tighter cost discipline and improving market sentiment.
  • Downside risks: intensifying competition and unfavourable regulatory changes.

NGOH Yi Sin CGS-CIMB Research | 2019-04-25
SGX Stock Analyst Report ADD MAINTAIN ADD 7.900 SAME 7.900