Singapore Exchange - DBS Research 2020-08-03: Dividend Increase A Surprise

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Dividend Increase A Surprise

SGX's 4QFY20 net profit of S$121m (+17% y-o-y/ -12% q-o-q) ahead of expectations.
Dividends increase a surprise; SGX to pay quarterly dividend of 8.0 Scts (prev: 7.5% Scts).
Keep watch on exit of MSCI ex-Singapore contracts.
Upgrade SGX to HOLD, Target Price raised to $8.40; dividend yield to lend support to share price.

SGX (SGX:S68) reported 4QFY20 net profit of S$121m (+17% y-o-y, - 12% q-o-q) which was ahead of consensus and our estimates. See SGX Announcements.
Net profit was driven by strong revenue growth (S$278m, +12% y-o-y, -6% q-o-q) outpaced decline in expenses growth in the quarter, as SGX saw broad-based revenue growth y-o-y driven by volatility in global markets and increased participation from customers while fixed income, currencies and commodities (FICC) and equities saw lower volumes q-o-q from the high base in previous quarter.

Cash equities trading and clearing revenue improved 48% y-o-y/ declined 3% q-o-q as Securities Daily Average Value (SDAV) at S$1.55bn improved 42% y-o-y and declined 3% q-o-q on average clearing fees of 2.74bps (3Q: 2.79bps). During the year, retail participation had increased from 15 to 21%, and led volumes during 2HFY20 as retail investors were net buyers, while institutional investors were net sellers.
Derivatives revenues came off from a high base in the previous quarter, declining 13% y-o-y/ 2% q-o-q as volumes declined 18% y-o-y/ 31% q-o-q, as average fees per contract for Equity, Currency and Commodity derivatives increased to S$1.24 (3Q: S$1.12) due to higher volumes from higher fee paying customers and lower volumes in A50 contracts.
Total open interest continues to be high at ~US$5.8bn with high margin balances and net yield driving derivatives' collateral management income. Going forward, given lower interest rates, we expect collateral management income growth to slow.

SGX increased its quarterly dividend to 8.0 Scts per quarter (from 7.5 Scts per quarter), recommitting its dividend policy to pay sustainable and growing dividends, in line with SGX’s long-term growth prospects, barring unforeseen circumstances. See SGX Dividend History.

Management is of the view that volumes could ease from the peak in 2HFY20 and believes that investment and risk management activities are likely to continue, driven by prolonged low interest rates and ongoing market volatility.

We upgrade SGX to HOLD, Target Price S$8.40, representing c.21x one-year forward P/E which is at - 1S.D. below its 5-year historical mean.
Our revised Target Price of $8.40 is based on the dividend discount model (k=7%, g=3%, ROE=35%) as we lower our cost of equity assumptions. We revised our earnings by 1-3% through FY22F on higher revenue assumptions arising from equities.
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/ 2020-08-03

SGX Stock Analyst Report HOLD UPGRADE FULLY VALUED 8.40 UP 7.400