SGX - DBS Research 2020-04-24: Medium-term Outlook Remains Intact


SGX - Medium-term Outlook Remains Intact

  • SGX's 3QFY20 net profit of S$138m (+38%y-o-y) beat consensus estimates.
  • 3QFY20 saw strong revenue growth across all segments.
  • Interim dividend of 7.5 Scts declared (unchanged y-o-y).
  • Downgrade to HOLD, with revised Target Price of S$10, on rich near-term valuations.

Solid 3QFY20

  • SGX (SGX:S68) reported quarterly net profit of S$138m (+38% y-o-y, +38% q-o-q) which was ahead of consensus. Total revenue growth (S$296m, +29% y-o-y, +28% q-o-q) outpaced that of expenses as all segments saw strong growth in the quarter, driven by volatility in global markets and increased participation from customers.
  • SGX’s guidance for operating expenses increased to S$485-495m on higher activity-related costs, launch of SGX care package (S$5m) and acquisition of Scientific Beta. SGX will be incurring interest expense going forward on its c.S$300m borrowings which will be rolled into long-term debt.

Strong volumes across all asset classes.

  • Cash equities trading and clearing revenue improved 65% y-o-y/48% q-o-q as Securities Daily Average Value (SDAV) at S$1.61bn rose 51% y-o-y and 57% q-o-q on stable average clearing fees of 2.79bps (prior year: 2.80bps).
  • Derivatives revenues continued to be driven by volumes in the quarter as volumes grew 26% y-o-y/54% q-o-q as iron ore contracts, currency futures, and main equity index futures all saw a surge in volumes, while average fee per contract for Equity,
  • Currency and Commodity derivatives was stable at S$1.12 (prior year: S$1.11).
  • Total open interest remained high at US$6bn (+5% y-o-y) with high margin balances driving derivatives' collateral management income.
  • Going forward, given lower interest rates, we expect collateral management income growth to slow.

SGX Product updates.

  • SGX is looking into introducing Single Stock Futures for selected Singapore stocks, which will provide access to Singapore risk premium.
  • In relation to discussions on the joint derivatives project at India's GIFT city with National Stock Exchange of India (NSE), it will likely see some delay due to the ongoing COVID-19 situation.
  • SGX continues to look into scaling up in the FX and index space post Scientific Beta’s acquisition, which has contributed S$6m in revenue since Feb 2020.

SGX shift to half-yearly reporting from FY21; dividends continue to be paid quarterly.

  • SGX will continue to pay a quarterly DPS of 7.5 Scts and management has reaffirmed its aim to pay a sustainable and growing dividend over time, in line with SGX’s long-term growth prospects.

Valuation and recommendation

  • We downgrade SGX to HOLD, on rich near-term valuations as its c.23x one-year forward PE multiple is at +1.5 SD above its 4-year historical mean.
  • Our revised Target Price of S$10 is based on the dividend discount model (k=7%, g=4%, ROE=39%) as we revise our ROE assumptions from 38% to 39%. We also increased our FY21F earnings forecast by c.5% as we believe that derivatives will continue to drive growth in revenues.
  • See SGX Share PriceSGX Target PriceSGX Analyst ReportsSGX Dividend HistorySGX AnnouncementsSGX Latest News

Rui Wen LIM DBS Group Research | 2020-04-24
SGX Stock Analyst Report HOLD DOWNGRADE BUY 10.00 UP 9.600