Singapore Exchange - OCBC Investment 2019-10-25: 1QFY20 Earnings Beat


Singapore Exchange - 1QFY20 Earnings Beat

  • SINGAPORE EXCHANGE LIMITED (SGX:S68)'s 1QFY20 net profits of SGD114mn (+24% y-o-y) was its highest in more than a decade, which was driven by meaningful jump in iron ore (+98%) and FX (+40% y-o-y) derivatives despite decline in equity derivative volumes.
  • Interim dividend of 7.5Scts per share was announced, which met expectations.
  • Near term share price may benefit from the current risk-on environment and delay in HK Exchange’s planned launch of competitor product (China A50).
  • Fair value of SGD8.60 implies FY20E PER of 22x.

Singapore Exchange Investment thesis

  • Operating an integrated securities and derivatives exchange across different asset classes. SGX is the leading securities market in Southeast Asia, exchanging trade stocks and bonds, ETF, warrants, derivatives and infrastructure funds. The Equities segment contribute an estimated 70-80% to total revenues, while Fixed Income, Currencies and Commodities (FICC) and Data, Connectivity and Indices (DCI) contribute 10-20% each.
  • Looking ahead, the company expects FICC and DCI to be relatively faster growth areas. The company has committed to a base dividend payout of 7.5 cents per quarter.

SGX's 1QFY20 results were ahead of expectations

  • SGX's 1QFY20 results were ahead of expectations, with net profit of SGD114mn gaining a solid +24% y-o-y (+10% q-o-q) driven by growth in iron ore contracts (one of its most profitable contracts). See SGX Announcements.
  • 1Q revenues of SGD248mn grew +19% yoy (flat qoq), with higher revenue recorded across all business segments – FICC revenue (19% of group) +57% y-o-y/+13% q-o-q, Equities (~71% of group) +14% y-o-y/-3% q-o-q, DCI (10% of group) +4% y-o-y/-1% q-o-q.
  • Equity derivatives contract volumes of about 48.1mn declined -10% q-o-q, with China A50 volumes falling -23% q-o-q.
  • Opex of SGD113mn was seasonally low at the start of the financial year, meeting expectations. Following the business re-organisation, SGX reclassified its revenues to reflect the new business units.
  • In terms of post results guidance, management maintained the prior operating expense guidance of SGD465-475mn and capex of SGD45-50mn for FY20E with possibility for bolt-on acquisitions.
  • 1QFY20 interim dividend of 7.5Scts per share was announced, unchanged as expected. See SGX Dividend History.

Raising estimates and fair value to SGD8.60

  • Raising estimates and fair value to SGD8.60, which implies forward PER of 22x, +1 standard deviation to its past five year historical average multiple of 20.5x.
  • Near term buoyancy in share price, but valuations getting extended – Year to date, share price gains has outperformed the STI index. See SGX Share Price; Straits Times Index constituents share price performance. While near term share price may continue to benefit from the current risk-on environment and delay in HK Exchange’s planned launch of China A50 competitor products (although this should still come through eventually), we see valuations getting extended and believe tactical positions will need to remain nimble.
  • Looking ahead into the new financial year, potential mergers & acquisitions is one area to monitor following SGX’s latest establishment of a SGD1.5billion multi currency debt issuance programme in October 2019, its first such facility, for flexibility to deploy funds to tap growth opportunities quickly in future in line with strategic priorities to grow across asset classes in different geographic locations.

Potential catalysts

  • Synergies from product development, internal restructuring exercise or alliances with other bourses which increase trading flows and bottom line; Tighter cost controls; Higher turnover; Improved cash equity and derivative volumes, stronger FICC growth momentum, pick-up in general risk appetite, trading activities and new issues; Dividend surprise.

OCBC Research Team OCBC Investment Research | 2019-10-25
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.60 UP 7.600