Singapore Exchange Ltd - OCBC Investment 2019-08-01: Lifted By Derivatives Business


Singapore Exchange Ltd - Lifted By Derivatives Business

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)'s FY2019 net profit reached an eleventh year high, driven by derivatives business (~51% of total revenues, vs ~40% a year ago).
  • Management guided for lower op-ex in FY20.
  • Neutral outlook maintained due to stretched valuations and modest earnings outlook

FY2019 net profit better than expected

  • Singapore Exchange (SGX)'s FY2019 net profit of SGD was better than expected and reached 11th-year high, driven by derivatives business (~51% of total revenues, vs ~40% a year ago).
  • SGX released the final quarter of financial year 2019’s results which was another strong quarter where core net profit gained 24% y-o-y.

Lift from derivatives strength in FY19 (China A50, MSCI Taiwan and iron ore contracts)

  • For the full FY2019 results highlights year, SGX's FY19 revenue of SGD910mn grew +8% while net profit of SGD391mn reached an eleventh year high. Key contributor of the profit lift was strong derivatives performance (top line grew 35%), traded volume grew +21% to a record SGD240mn while overall traded values in the equity market fell -17% to SGD259bn (in line with regional indices). Blended average fee per contract improved from SGD1.06 to SGD1.09.
  • Equities and fixed income business recorded SGD348mn in revenues, -15% y-o-y and accounted for a smaller 38% of total revenues (vs ~48% a year ago).
  • Full year expenses increased 7% y-o-y to SGD449mn due to higher marketing, technology and staff costs as initiatives to digitalise processes and improve information security were implemented.
  • SGX declared unchanged dividend per share of 30 cents (representing ~82% payout for FY19). FY19 EPS of 36.5cents represented 8% y-o-y growth. See Singapore Exchange's dividend history.

No change in our neutral stance on the stock, based on valuations and a modest earnings outlook.

  • Having gained year to date broadly in line with the STI index, valuations at 21x forward PER look fair. For FY20, SGX is expected to continue executing on its strategic priorities and guided for operating expenses between SGD465-475mn, and technology related capex around SGD45-50mn (vs SGD55mn in 2019). FY20E costs are expected to be driven by headcount and royalties expenses.
  • Over the medium term (next 5 years), its new FICC (fixed income, currencies and commodities) and DCI (data connectivity and indices) segments are expected to be twice the current size.

OCBC Research Team OCBC Investment Research | 2019-08-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 7.600 SAME 7.600