Singapore Exchange 4Q19 - CGS-CIMB Research 2019-08-01: Limited Upside; HOLD For Quality Yield


Singapore Exchange 4Q19 - Limited Upside; HOLD For Quality Yield

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)'s 4Q19 net profit +24% y-o-y on robust derivatives volume; FY19 at 11-yr high.
  • We think a c.S$20m step-up in opex guidance and persistent securities weakness could mitigate derivatives volume growth in FY20F.
  • Downgrade to Hold with 4% yield; will revisit at a lower price level.

FY19 in line; net profit +8.0% y-o-y at an 11-year high

  • Singapore Exchange reported a strong 4Q19, with core net profit rising 24% y-o-y and bringing full-year earnings to 103% of our/consensus forecasts. Derivatives segment was the outperformer, as traded volume grew 21% to 240m contracts, offsetting the 15% y-o-y decline in equity traded value.
  • FY6/19 saw higher opex of S$449m on the back of higher staff costs (additional headcount plus salary increment), technology expenses (digitalisation and IT security improvements) and more marketing activities. Management guided for higher opex of S$465m-475m and lower capex of S$45m-50m in FY20F.
  • Final DPS of 7.5 Scts brings Singapore Exchange's FY19 DPS to 30 Scts (82% payout), within expectations.

Derivatives’ strength makes up half the battle

  • Increased demand for China A50, MSCI Taiwan and iron ore contracts underpinned the 35% derivatives topline growth in FY19, apart from an uptick in average contract fee (from S$1.02 to S$1.14 with more full fee-paying customers) and higher collateral management income (open interest +17% y-o-y).
  • Within the broader product offering, we think MSCI net total return and FX futures could remain earnings drivers over FY20-22F.
  • With an expanding international presence and investments (Trumid, BidFX, Freightos), as well as recent organisational changes, management seeks to double its fixed income, currencies and commodities (FICC) and data, connectivity and indices (DCI) segments in five years’ time, possibly with bolt-on acquisitions.

Continual weakness in equities & fixed income

  • Securities trading and clearing revenue now forms 20% of FY19 revenue (FY18: 26%) as SDAV fell 17% to S$1.04bn on weaker market conditions, and average clearing fees were lower at 2.66bp (FY18: 2.72bp) with greater participation from market makers. SGX recorded lower contribution from issuer services (fewer equity and bond listings) and post trade services (due to downward repricing and reduction in settlement activities). We expect such weakness to persist in FY20F, as new structured products (single stock DLCs) take time to ramp up.

Downgrade to HOLD; c.4% div yield as share price support

  • We raise our FY20-21F EPS by 2.0% on higher revenue and opex assumptions, and introduce our FY22F forecasts. We also roll forward our valuation to FY21F P/E, resulting in a higher Target Price of S$8.10, now pegged to 21.5x (0.5 s.d. below historical mean).
  • Downgrade to HOLD with limited upside and supported by c.4% dividend yield.
  • Upside risks to our Hold call could stem from tighter cost management, win-win Nifty resolution and synergistics M&As.
  • Downside risks: rising competition and market risk-off mode.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-01
SGX Stock Analyst Report HOLD DOWNGRADE ADD 8.10 UP 7.900