Singapore Exchange Limited: Strong Performance as Markets Spur into Action October 26, 2017 1176

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: SGD8.31
  • 1Q18 PATMI was in line with our estimates.
  • New IPOs in FY18 expected to be in the high 20s compared to FY17’s 22.
  • Equity, FX and commodity derivatives volume expected to be strong in FY18.
  • Securities clearing fee spreads were down due to higher trading volumes by MMLPs and higher composition of products such as ETF and DLC.
  • An interim dividend of 5 cents per share proposed, unchanged YoY.
  • Maintain Accumulate with lower TP of S$8.31 (previous TP S$8.39) based on 23.9x historical 5-year average PE ratio.

V1

POSITIVES

+ Securities trading and clearing revenue up 9% YoY to S$51.2mn due to an 18% YoY increase in SDAV. 1Q18 Traded value in equities which include ordinary shares, REITs and business trusts increased 14% YoY to S$67.5bn. The traded value in other securities products which include warrants, ETFs, Daily Leveraged Certs (DLC), debt securities and American depository receipts (ADR) increased 82% to S$5.7bn.

+ Listing revenue up 6% YoY to S$13mn due to a higher number of new bond listings. 1Q18 had 347 bond listings raising S$156.1bn compared to 139 listings raising S$59.4bn in 1Q17.

+ Market Data and Connectivity revenue up 10% YoY to S$24.2mn, accounting for 12% of total revenue. The increase is due to higher reported data usage and also from continued growth of SGX’s colocation services business.

+ Positive Jaw of 2%. Revenue was up 7% and operating expenses was up 5%, an improvement of a flat jaw in FY17.

+ Derivatives revenue increased 14% YoY to S$80.6mn, accounting for 39% of total revenue. Total volumes increased 15% YoY to S$46.2mn contracts. All key products: China A50 Index Futures, Nikkei 225 Index Futures, SGX Nifty 50 Futures, USD/CNH futures, INR/USD futures and Iron Ore Futures improved after a weak performance in FY17. Strategy to grow the business further will include new products launches, cross product margin offsets and improvements to product features such as the tighter spread on the INR/USD futures compared to OTC market.

NEGATIVES

– Securities average clearing fee have been declining sequentially. 1Q18 average clearing fee was 2.70 bps which is lower than FY17’s 2.82 bps and FY16’s 2.90 bps. The lower average clearing fee was due to increase in trading of warrants, ETFs, recently launched DLCs and higher trading volumes by Market Makers & Liquidity Providers (MMLP) as these market participants generally pay lower clearing fees. We estimate that the percentage value of warrants, ETFs and DLCs against total traded value have been increasing over time from 2% in 2016 to 5% in 2017 and now 7.8% in 1Q18.

– Post-Trade Services down 9% YoY to S$26.4mn, accounting for 12% of total revenue. Contract processing revenue declined 58% from S$3mn a year ago to c.S$1mn because brokers are migrating to their own systems and no longer need SGX’s contract processing services. It is estimated that this revenue stream will cease by early 2018. In the other segment of Post Trade Services, the securities settlement revenue proves to be stable and makes up c.88% of the Post Trade Services revenue. However, we think that this segment appears to be stagnating and would not contribute meaningfully to SGX’s growth in FY18.

OUTLOOK

We have increased our FY18e SDAV estimate S$1.23bn (previous estimate S$1.16bn) because we expect continued strong growth in ETFs, DLCs and warrants traded volume; and we also expect stronger equities traded volume especially in property and finance counters. We also increase our FY18e total derivatives volume estimate to 199mn contracts (previous estimate 187mn contracts). We expect stronger traction for existing derivatives products as well as higher traded volumes from new product launches in FY18. In the derivatives portfolio, we are most upbeat on the China A50 Equity Index Futures and the USD/CNG Futures following the relaxation of rules in China pertaining to Equity Index Futures trading earlier this year. Both products make up 39% of SGX’s derivatives traded volume. FY18e operating expense guidance remains unchanged at the range of S$425mn to S$435mn.

Investment Actions

Maintain Accumulate with lower TP of S$8.31 (previous TP S$8.39) based on 23.9x historical 5-year average PE ratio. Our lower target price is due to weak revenue growth outlook in Post Trade Services in FY18e and we lowered our revenue expectation for securities clearing fee due to the higher contribution from low margin products.

V2

V3

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:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

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.

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!