SINGAPORE EXCHANGE LIMITED (SGX:S68)
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
- the heavier weighting of Chinese shares in MSCI global benchmarks will grow market size and liquidity even for Singapore Exchange’s China A50 futures,
- any new product will take at least 2-3 years to ramp up, and
- 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
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https://research.itradecimb.com/
2019-04-25
SGX Stock
Analyst Report
7.900
SAME
7.900
