Singapore Exchange - OCBC Investment 2020-01-24: Softer 2QFY20


Singapore Exchange - Softer 2QFY20

  • SINGAPORE EXCHANGE (SGX:S68)'s 2QFY20 operating revenues and net profit grew 3% y-o-y but declined on a quarterly basis on lower equity derivative volumes.
  • Quarterly dividend of 7.5 Scts/share announced was in line with expectations. See SGX Dividend History.
  • Plan to acquire 93% stake in smart beta index provider Scientific Beta for EUR186mn, to broaden its range of products and clients reach.

Modest 2QFY20 results

  • Modest 2QFY20 results, with lower trading volumes in equity derivatives (-18% y-o-y to 41 mn contracts) although traded value on cash equity business and volumes of currencies & commodities business grew 9% and 8% respectively. Singapore Exchange's 2QFY20 net profit of $99mn grew 3% y-o-y but fell -13% q-o-q, keeping pace with top line growth of $231mn (+3% y-o-y/-7% q-o-q). EBITDA of $141mn grew 10% y-o-y (-10% q-o-q). Total expenses were managed (+1% y-o-y/-1% q-o-q) with higher staff costs and depreciation partly mitigated by lower discretionary expenses. Interim dividend of 7.5Scts/share was announced, which met expectations.
  • Despite the lower quarterly comparison, 2Q marked the highest second quarter revenue and net profit for Singapore Exchange in the last 5 years. In terms of divisions, FICC revenues of $39mn grew 20% while equities revenues of $165mn was flat. Data, connectivity and indices revenues of $27mn gained 4%. Average fee/contract for equity, currency and commodity derivatives grew 16% to S$1.23.
  • For 1H FY20, Singapore Exchange's revenues grew 11% to $478mn, comprising of equities (+6%), FICC (+38%) and data, connectivity and indices (+4%). Total expenses grew 5%, translating into positive 5% jaw ratio. Net profit for 1H grew 14% y-o-y to $213mn. See Singapore Exchange Announcements.
  • Guidance for FY20E total expenses ranging from $465mn-$475mn was maintained, while FY20E technology-related capital expenditure is estimated at $45-50mn Since the internal structure re-organisation last July, the company continues to work towards building up asset classes.

Acquire 93% stake in index provider Scientific Beta

  • In line with its goal of growing its data, connectivity and indices business, Singapore Exchange has announced its plan to acquire 93% stake in index provider Scientific Beta for EUR186mn. The proposed acquisition is not expected to have a material impact on its results in FY20E, while management expects the deal to be earnings accretive from FY21E.
  • We view the acquisition positively for the research-based index construction capabilities, index calculation services and potential to expand into smart ESG and green investing. As a result of the deal, Singapore Exchange also expects to service a wider range of customers across institutional client types and geographies and develop a broader range of products.

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.
  • See SGX Share Price; SGX Target Price.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-01-24
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.600 SAME 8.600