+ Derivatives the growth driver.Derivatives revenue rose 20% YoY stemming from the 34% surge in volumes. However, average fee per contract was down 11% YoY to S$1.07 due to change in product mix. Improvement in volumes came largely from China A50, Nikkei 225 and FX futures products.
+ Operating leverage intact. Revenue rose close to S$17mn QoQ and almost 70% (or S$12mn) flowed to net profits. SGX has managed to keep operating expenses relatively stable despite the improvement in revenue.
+ Higher number of listing expected. SGX mentioned FY18 equity listings would likely exceed FY17. This implies at least another 5 more IPOs in 4QFY18. Funds raised are up 6-fold YTD.
– No resolution with Indian exchanges. Recall that in Feb18, Indian exchanges announced they would stop licensing their index or provide data to foreign exchanges. This was to affect the continuity of SGX Nifty Fifty products. SGX recently stated it would list new India equity derivative products in June18. Unclear to us how these new products will be “seamlessly traded” and accepted by market participants. Also, there is the worry if such product could elicit some response from the Indian exchanges.
We maintain our BUY recommendation. The return of volatility, continuous stream of new products and operating leverage will be supportive of earnings growth. Valuations are attractive in view of the 35% ROEs, 4% dividend yield and momentum in earnings.