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

SINGAPORE EXCHANGE LIMITED (SGX:S68)

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.

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.

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 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 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.

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 Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-04-24

SGX Stock Analyst Report HOLD DOWNGRADE BUY 10.00 UP 9.600