• 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.

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.