Singapore Exchange Limited - Phillip Securities 2019-08-01: Record Derivatives Performance Cushions Equities Softness


Singapore Exchange Limited - Record Derivatives Performance Cushions Equities Softness

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)'s 4Q19 net profit up 24% y-o-y, 7.6% above our forecast.
  • Derivatives volume surged 33% y-o-y, driven by FTSE China A50 futures, MSCI Taiwan and iron ore derivatives contracts.
  • SDAV fell 14% y-o-y as investors adopt a cautious stance in face of slowing economic growth.
  • Full dividend per share of 30 cents fell short of our FY19 DPS target of 31.5 cents.
  • We maintain ACCUMULATE at an unchanged Target Price of S$8.09. We peg our Target Price to 21x P/E, 1 SD below SGX’s 5-year mean.

The Positives

4Q19 derivatives volume rose 33% y-o-y.

  • Record derivatives volume was driven by China A50 index futures which grew 18% y-o-y and accounted for 37% of total derivatives volume. DDAV improved 33% y-o-y/ 5% q-o-q as we continue to see higher trading volumes across key equity indices, FX futures and commodities contracts due to growth in passive investing and greater hedging needs against market volatility. Derivatives contributed 52% to total revenue. Average fee per contract increased from $1.06 to $1.09 due to lower contribution from market makers.
  • We expect market volatility to be favourable for derivatives volume. But due to potential competition from Hong Kong Exchange’s launch of China A50 index futures, we forecast a relatively unchanged DDAV for FY20-21E of 1,113k and 1,205k respectively.

Higher collateral management income.

  • The strong growth was the result of higher margin balances on the back of record open interest due to strong institutional demand of SGX’s derivatives contracts for portfolio risk management. Collateral management, license and other revenue grew 76.5% to $48mn in 4Q.

Operating expenses of $449mn hit the lower end of $445-455mn FY19e guidance.

  • We expect operating expense to be higher in 2020 due to three factors; increase headcount, larger depreciation expenses from new systems launched in FY19 and higher royalties and processing fees due to higher derivatives volume expected in 2020.
  • Management guided FY20 operating expenses to be between $465-475mn and technology-related CAPEX to be between $45-50mn.

The Negatives

Equities softness persists.

  • Equities revenue contracted 17% due to a 14% decrease in SDAV to $1.1bn. Average clearing fees declined from 2.72 bps to 2.66 due to higher participation from market makers. 4Q19 SDAV exceeded our estimates by 7% due to better than expected impact on equities from the stabilisation in global markets. However, due to continued uncertainty in markets, we conservatively maintain our SDAV for FY20-21e at $1.02bn and $1.01bn respectively.

Decent dividend payout.

  • Full-year DPS was $0.30 per share, 5% lower than our expectations. This puts full-year dividend payout ratio at 82% (FY18: 88%). We forecast FY20 DPS of $0.315, reflecting an 81% payout ratio.

Other Updates

SGX-IISL arbitration

  • SGX is optimistic that the joint proposal submitted by NSE and SGX will receive support from regulatory authorities. No timeline was announced and we await further updates.


  • We are positive that SGX’s strength in a diversified product suite will support derivatives volume growth and open interest in 2020. Market volatility has proven to be favourable for derivatives volume and the strength in derivatives growth should offset weaknesses in equities revenue. SGX’s derivatives business contributed to 51% of total revenue in FY19, with the main driver being FTSE China A50 Index Futures, which accounted for 44% of total trading volume. While HKEX’s launch of A-share contracts may pose headwinds, a larger trading ecosystem from both exchanges may limit downsides.
  • Our equities SDAV assumption is a decline of 2.3% in FY20e. Latest July 2019’s SDAV data registered a contraction of around 6.5% y-o-y

Investment Actions

We maintain ACCUMULATE at an unchanged Target Price of S$8.09.

  • We peg our Target Price to 21x P/E, 1 SD below SGX’s 5-year mean. At a closing price of $7.92 on 31 July 2019 and based on 32 cents dividend payout, the return is 6.1%.
  • SGX is enjoying structural growth in the derivatives business as it captures global flows into Asian equities, commodities and currencies.

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-08-01