Singapore Exchange - RHB Invest 2019-08-01: Earnings Driven By Derivatives, But Priced In

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SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Earnings Driven By Derivatives, But Priced In

• Downgrade to NEUTRAL from Buy with an unchanged SGD8.10 Target Price pegged to 23x FY20F (Jun) P/E, 2% upside plus 4% FY20F yield.
• SINGAPORE EXCHANGE LIMITED (SGX:S68)’s 4QFY19 net profit was up 24% y-o-y, ie close to our expectations – FY19 net profit accounts for 104% of our full-year forecast. Strength in China A50 Index futures trading offset the weakness from soft securities average daily value (SADV).

SGX's 4QFY19 SADV declined 16% YoY

• Singapore Exchange's 4QFY19 SADV declined 16% y-o-y to SGD1.09bn. FY19 SADV was at SGD1.04bn. Our FY20F SADV assumption is a higher SGD1.08bn, as we expect global stabilisation to drive FY20F SADV higher y-o-y.

4QFY19 derivatives volume rose 32% y-o-y.

• The key driver is the China A50 Index Futures, where FY19 volumes surged 41% y-o-y. We believe market volatility will keep derivatives volume firm.
• We have conservatively assumed flat FY20F derivatives average daily contract (DADC) on expectations of slower China A50 Index Futures trading, with the Hong Kong Exchange’s expected launch of the MSCI China A Index Futures.

Respectable dividend yield.

• Singapore Exchange declared a FY19 dividend of SGD0.30/share, representing a payout ratio of 82%. This is lower than FY18’s 88%. See SGX's dividend history.
• We forecast FY20 dividend of SGD0.31/share, based on an 85% payout ratio – this translates to a FY20 dividend yield of 4%, which is higher than the Singapore sovereign 10-year yield of 1.93%.

Strong balance sheet.

• Singapore Exchange remains in a net cash position, with a monopoly over trading of Singapore-listed equities.

Our TP of SGD8.10 is pegged to 23x FY20F EPS, ie the 4-year mean.

• Hypothetically, if FY20F SADV was 20% lower than our base case at SGD0.86bn, Singapore Exchange’s fair value would be SGD7.24. Given Singapore Exchange’s 12% YTD share price growth, we believe the positives (particularly for the derivatives business) are largely priced in – and downgrade our recommendation on the counter to NEUTRAL. See SGX's share price.
• Key risks are global economic fluctuations and geopolitical developments.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-01

SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 8.100 SAME 8.100