Singapore Exchange - 4Q15 results largely in line (derivatives remain very strong)

SGX reported 4Q15 NPAT of S$96 mn, up 24% YoY, slightly behind our forecast but in line with consensus. As such, we have largely left our earnings unchanged.

Key highlights: 
(1) Securities daily average traded value decreased by 4% YoY to S$1.1 bn. 

(2) Derivatives volumes in 4Q15 increased 111% YoY, driven by strong China A50 contract (up 79% compared to 3Q15 32 million contracts, driven by strong China momentum). 

(3) Link with Taiwan will possibly start in 1Q16.

Turnover has remained stable with the average daily turnover (ADT) at S$1.2 bn, in line with our forecast of S$1.3 bn for 1Q16E. Key upside driver is higher (China A50) derivative volumes, should recent volumes be sustained.

We left our target price unchanged at S$10.00; noting better outlook (both derivatives and equities) in our view and retain our OUTPERFORM rating, with our target price implying 25x 12-month forward earnings.

While we continue to view SGX’s solid longer-term growth prospects as a regional hub as strong (led by regional derivatives trading where it is gaining good momentum), we highlight that the nearer-term prospects of the stock are driven by current securities market volumes.

Equity volumes remain stable
We highlight that recent market volumes remained stable—with 1Q16E ADT over the past few weeks remaining S$1.3 bn—which is in line with our forecasts.

SGX has introduced a new fee structure to encourage market makers and liquidity providers (now representing 16% of total trade value) which we believe should help volumes improve over time. On 19 January 2015, SGX reduced the standard board lot size from 1,000 to 100, which is beneficial for the retail market participation.

Derivatives key to growth (with upside risk)
We continue to see derivatives as a key medium-term growth driver for SGX which recorded strong growth in 4Q15: volumes up 111% YoY to 53.2 mn contracts, with China A50 up 79% YoY, now making up 60% of the total derivatives, up from under 30% at the beginning of 2014. Derivatives revenues increased to 38% of total SGX revenues in FY15 (including EMC), from 26% in FY12 and 21% in FY11.

Technical Analysis
Daily Chart
Valuation sensitivity
The key driver of SGX’s share price remains shorter-term trends in equity and derivatives turnover. SGX is currently trading on 21x 12- month forward P/E, in-line with its eight-year average P/E multiple of 21x (range of 16-25x). On a relative basis (to the Singapore Straits Times Index), SGX is trading slightly above its long-term average (around 55% premium). (Read Report)

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Source : Credit Suisse Asia Pacific Equity Research

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