Singapore Exchange - 1Q16 largely in line, with the more recent derivatives momentum slower


SGX reported 1Q16 NPAT of S$99 mn (up 28% YoY), 3% behind our forecast, but in line with consensus. We highlight that 2Q16 derivatives volumes have been especially weak (at 0.35 mn ADV). As such, we have reduced our forecasts by 2-3% (reducing our derivative ADV assumptions to 0.75 mn for FY16).

Key highlights.
(1) Securities average daily traded value increased by 27% YoY to S$1.2 bn.

(2) Derivatives volumes in 1Q16 increased 82% YoY, driven by strong China A50 contract (up 164% YoY, but down 11% MoM) and strong China momentum.

(3) Dividend of 5 cents per share was announced.

New CEO's key focus areas. (1) Improving market liquidity, (2) developing currency futures, (3) developing a regional fixed income platform (bond trading platform launched in the coming months) and (4) grow market data and index businesses (i.e. SGX Index Edge).

We leave our target price unchanged at S$10.00 and retain our OUTPERFORM rating, with our target price implying 26x 12-month forward earnings. Downside exists if derivatives continue to slow

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

Equity volumes remain robust
We highlight that recent market volumes remained robust, with 2Q16E ADT over the past few weeks also remaining at S$1.2 bn, which is in line with our forecasts.

SGX has introduced a new fee structure to encourage market makers and liquidity providers (now representing 18% 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 has been beneficial for retail market participation.

Derivatives slowing down (with downside risk)
Derivatives have been showing a downward trend in the recent months—volumes up 82% YoY, but down 1% MoM to 52.5 mn contracts, with China A50 up 164% YoY and down 11% MoM, now making up 54% of the total derivatives, up from under 30% at the beginning of 2014. Derivatives revenue increased to 41% of total SGX revenue in 1Q16 (including EMC), from 26% in FY12 and 21% in FY11.

Technical Analysis
Daily Chart
Valuation sensitivity
Shorter-term trends in equity and derivatives turnover remain as the key driver of SGX’s share price. 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 70% premium). (Read Report)

Read Related Reports
1) Singapore Exchange - Volatility-led improvement by DBS Group Research, published on 22 October 2015

2) Singapore Exchange - In line with expectations; new CEO lays out priorities; stay Neutral by Goldman Sachs Equity Research, published on 22 October 2015

3) SGX - Derivatives Surge YoY But Soften Sequentially by RHB Research, published on 22 October 2015

4) Singapore Exchange - In the price by CIMB Research, published on 21 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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