Singapore Exchange Limited: Securities Business Charged Up by “Animal Spirits” January 20, 2017 411

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 7.75


  • 2QFY06/17 Total revenue increased 2.6% y-o-y to S$199.6mn and PATMI increased 5.5% y-o-y to S$88.3mn.
  • Operating expenses decreased 3.6% y-o-y, if exclude the one-off costs of S$3.6mn for the Baltic Exchange acquisition.
  • Interim dividend of 5 cents per share proposed.
  • Maintain “Accumulate” with higher TP of S$7.75 (vs. previous TP of S$7.69)


Equities and Fixed Income business boosted by higher SDAV and bond listings. Securities Trading and Clearing revenue increased 11.7% year-on-year (y-o-y) as Securities Daily Average Volume (SDAV) improved 17% y-o-y to S$1.09bn. However, average clearing fee declined y-o-y and quarter-on-quarter (q-o-q) to 2.86bps (2QFY06/16: 2.93bps and 1QFY06/17: 2.89bps). The higher SDAV was attributed stronger market participation upon the conclusion of the US election. Issuer Services revenue increased 1.4% supported by 204 bond listings compared to 73 bond listings in 2Q16. We expect the strong “animal spirits” post US elections to continue driving the equities markets.

Equity and Commodities derivatives revenue decreased 2.8% y-o-y. Total volumes were up 5% y-o-y but average fee per contract declined to S$1.16 compared to S$1.28 a year ago. Volumes were boosted by SGX Nifty 50 Index futures (up 11% y-o-y), MSCI Taiwan Index futures (up 15% y-o-y), MSCI Singapore Index futures (up 14% y-o-y) and Iron Ore futures (up 80% y-o-y). The fall in revenue was caused by a steeper decline in average fee per contract which was mainly attributed to Iron Ore futures contract rebates given to clients. We think that SGX’s rebates allow it to maintain over 90% market share of the Iron Ore futures market. We expect SGX to leverage their market share in Iron Ore futures to expand the Freight business as an adjacent market which they had purchased the Baltic Exchange for. On a longer term outlook, we expect the enlarged “ecosystem” of Freight and Iron Ore derivatives to create better client stickiness.

Cost impact. Operating expenses were supported by lower depreciation expenses (down 10.6%) from fully depreciated systems. Excluding the one-off costs related to the acquisition of The Baltic Exchange, expenses would have been S$93.6mn (down 3.6% y-o-y). Management’s FY17e guidance for operating expenses is adjusted lower to between S$405mn and S$415mn, an improvement from 1QFY06/17’s guidance of between S$420mn and S$430mn. We adjusted our FY17e operating expenses accordingly, from S$429mn to S$412mn, leading to FY17e net margin to c.42% (vs. previous c.41%), which is unchanged from FY16’s 42%.

Investment Actions

We have lowered our FY17e revenue from S$817mn to S$814mn because of expectations of weaker revenue contributions from derivatives as average fee per contract continues to trend on the low side. But we expect FY17e PATMI to improve to S$347mn compared to previous estimate of S$338mn because of a steeper decline in operating expenses. We have also updated the 5-year historical PER in the valuation method to 23.9x, previously 24.3x. Maintain “Accumulate” with higher TP of S$7.75 (vs. previous TP of S$7.69) because of a margin boost from better than expected costs savings.

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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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