Singapore Exchange Limited: High Costs and Low Top Line Growth May Drag Full Year Results Down April 21, 2017

PSR Recommendation: NEUTRALStatus: DowngradedTarget Price: 7.45
  • Excluding one-off loss of S$4.0mn from the disposal of shares of the Bombay Stock Exchange, 3QFY06/17 PATMI would have decreased 2% y-o-y to S$87mn in line with our expectations of S$83mn.
  • Operating expenses decreased because of lower Processing and Royalties expense and lower Professional fees.
  • Total revenue was lower because of weaker y-o-y Derivatives Trading Volume.
  • Interim dividend of 5 cents per share proposed.
  • Downgrade “Neutral” with lower TP of S$7.45 (vs. previous TP of S$7.75)

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  • Equities and Fixed Income business boosted by higher SDAV and bond listings. Securities Trading and Clearing revenue increased 1.0% year-on-year (y-o-y) as Securities Daily Average Volume (SDAV) improved 1.6% y-o-y to S$1.24bn. The higher SDAV was due to the continued positive momentum post US Presidential Election. Issuer Services revenue increased 2.0% supported by 189 bond listings compared to 78 bond listings in 3QFY06/16.
  • Equity and Commodities derivatives revenue decreased 12.7% y-o-y. Total volumes decreased 18% y-o-y to 39.9mn contracts but average fee per contract increased to S$1.20 compared to S$1.15 a year ago due to change in mix of Derivatives contracts. Volume decreases were led by SGX China A50 Index futures (-30% y-o-y), Japan Nikkei 225 index futures (-36% y-o-y) and SGX Nifty 50 Index futures (-9% y-o-y). The fall in volumes in key Equity Derivatives was a result of lower hedging activities by market participants at the beginning of 2017 as markets were less uncertain and less volatile compared to the same period in 2016. Despite weaker volume, SGX China A50 Index futures and SGX Nifty 50 Index futures improved market share from 32% to 34% y-o-y and 40% to 48% y-o-y respectively. But Japan Nikkei 225 index futures saw a decline of market share from 17% to 16% y-o-y.
  • Cost Impact. Processing and Royalties expenses decreased 31% y-o-y due to lower Derivatives volumes. Professional fees decreased 75% y-o-y due to one-off fees for the acquisition of Baltic Exchange a year ago. We expect 4QFY06/17e operating expenses to be at least S$114mn because of: 1) Seasonally higher expenditure in the 4th quarter. 2) Higher staff costs owing to more hires. 3) Technology expense is expected to pick in 4QFY07/17 and continue to go up in next few quarters. 4). Higher Processing and Royalties costs as Derivatives volumes pick up. Management’s FY17e guidance for operating expenses is on the lower end of the S$405mn to S$415mn range, unchanged from previous quarter.

Investment Actions

We expect 4QFY06/17e PATMI to be between S$90mn to S$95mn and we revise our FY17e PATMI to S$333mn from previous estimate of S$347mn. Downgrade “Neutral” with lower TP of S$7.45 (vs. previous TP of S$7.75) because inasmuch as we expect higher manpower costs and technology expenses in a seasonally higher operating costs environment in the 4th quarter, we do not see any near term catalysts to boost top line to positively  offset the higher costs.

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About the author

Profile photo of Jeremy Teong

Jeremy Teong
Investment Analyst
Phillip Securities Research Pte Ltd

Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.

He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.

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