Source: Company, PSR
The Positives
+ Derivatives business continues on its growth trajectory. Derivatives revenue rose 12% YoY stemming from the 20% surge in volume, reaching a record high of 198mn contracts. However, the average fee per contract was down 10% YoY to S$1.06 due to change in product mix towards lower yield products. Improvement in volumes came largely from China A50, Nikkei 225 and FX futures products.
+ Securities to benefit from volatility. SDAV achieved a 5-year high of S$1.26bn, a 12% increase YoY. SDAV was boosted by new DLCs and efforts to grow retail market participation. Expectations of more rate hikes in the US Federal Funds Rate and trade war conflicts could fuel more reallocations of investment holdings within investors’ portfolios; which could result in higher volumes generated in the upcoming quarters.
+ New dividend policy to support growth. The old dividend policy was a payout ratio of at least 80% of net profit. The average payout ratio for past 3 years was 87%. Moving forward, the new dividend policy provides flexibility to balance quarterly dividend payments of 7.5 cents/share which will enable SGX to retain earnings to support growth. Based on our estimates, the resulting payout ratio for FY19 and FY20 would be lower at 84% and 83% respectively, assuming SGX’s annual dividends of 30 cents remains unchanged from FY18. Shareholders can now receive dividends earlier and potential growth in dividends relies on future performances.
+ Market Data and Connectivity revenue up 5% YoY to S$98.3mn, accounting for 12% of total revenue. The increase is due to continued growth in data licences for application system usages and SGX’s colocation services business.
+ Listing revenue up 5% YoY to S$51.6mn due to a higher number of new bond listings. FY18 had 1,154 bond listings raising S$481.9bn compared to 819 listings raising S$384.7bn in FYQ17. The 22 new equity listings in FY18 raised S$6.2bn as compared to 22 listings that raised only S$1.3bn in FY17.
The Negatives
– Arbitration with IISL hangs in limbo. The cross-border trading link collaboration in GIFT City seems to be back on the table; as a result, arbitration proceedings have been deferred but SGX’s extension of SGX Nifty contract licence beyond August 2018 remains valid. Uncertainties caused by the developments on India derivatives since February 2018, was reflected in the weaker derivatives average daily volume in 4QFY18 and remains uncertain until the arbitration has a conclusion. DDAV in 4QFY18 decreased 10.9% QoQ but increased by 13.6% YoY. However, the continuation of licensing and postponement of arbitration should provide some stability for the India derivatives in the near term. Nifty 50 Index Futures accounted for 11% of the total volume of derivatives traded in FY2018.
– Average securities clearing fee has been declining. FY18 average clearing fee was 2.88 bps which is lower than FY17’s 2.94 bps due to higher trading volumes by Market Makers & Liquidity Providers (MMLP) as these market participants generally pay lower clearing fees.
– Post Trade Services down 14.2% YoY to S$99.3mn, accounting for 12% of total revenue. Contract processing revenue declined 71% from S$11.6mn in FY17 to S$3.4mn because brokers migrated to their own back-office systems in February 2018 and no longer require SGX’s contract processing services. In the other segment of Post Trade Services, the securities settlement revenue declined 8% due to a change in the mix of subsequent settlement instructions. However, we think that this segment appears to be stagnating and would not contribute meaningfully to SGX’s growth in FY19.
Outlook
Good earnings growth is supported by volatility, operating leverage and robust balance sheet. We have increased our FY19e SDAV estimate to S$1.32bn (previously S$1.20bn) because continued stock-market volatility driven by the US-China trade conflict and rising interest rates could benefit trade volume in the short term as the market whipsaws in both directions. SGX’s debt-free balance sheet and monopoly should facilitate inorganic earnings growth.
Investment Actions
We maintain our BUY recommendation. Valuations are attractive in view of the 38% ROEs, 4% dividend yield and momentum in earnings.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.
She graduated with a Bachelor of Accountancy with a major in Finance from SMU.
