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SGX will report its 1QFY16 results on Wednesday 21 October, followed by a briefing at 6pm SGT (http://edge.media-server.com/m/p/jhxxd4qg). The results are expected to be strong, with cash market ADT at a two-year high, explaining our forecast NPAT of S$96m (-1% qoq) despite seasonal weakness from corporate action revenue. However, with China A50 volume dropping to its lowest level since Feb 2015 (5.8m contracts in September) and the primary market continually weak, we and investors await CEO Boon Chye's words on SGX's priorities going forward. Retain Buy on unchanged forecasts and target price of S$9.4.
Expecting a stable 1QFY16, with the following key trends:
• On moderating A50 volume (-11% qoq) and a 41% surge in commodities, we expect derivative trading revenue to be flat at S$85m, or 40% of total revenue. We forecast an average derivative trading fee of S$1.16 (4Q: S$1.13).
• Securities trading revenue is also likely to be flat qoq at S$56m, with the ADT boost from strong trading activity in August partially offset by the drop in average clearing fees as MM/LPso penetration increases.
• We forecast stable revenue to drop 3% on continually poor primary market and seasonally weak corporate action revenue, with only S$104m of primary market funds raised in 6 IPOs this quarter (none on the Mainboard).
• With no new expense items other than S$6m of EMC expenses, opex will be relatively consistent at S$103m, leading to a stable CIR of 48.3%.
Market Stats - cash market improves in 1QFY16 but A50 slumps in September
China A50 volume contracted 11% qoq to 28m contracts, with 5.8m contracts traded in September, the lowest since Feb 2015. However, the 28% uptrend in Nikkei futures and 41% qoq growth in commodity derivatives to 2.7m contracts cushioned derivative ADV to 827k contracts/day (-13% qoq). Reflecting strong trading in August, cash market ADT reached a two-year high of S$1.23bn (+2.4% qoq) in 1Q FY16, but reduced FSSTI volatility meant September ADT was S$1.1bn. Moreover, attracting funds to the primary market remained a challenge with no Mainboard IPO recorded since Jan 2015.
Unchanged rating and target price; downside risks
We value SGX on a 10-year DDM, implying a target price of S$9.40 and we rate it Buy on stable EPS growth of 9% over the next four years and a dividend yield in excess of 4%. On our estimates, SGX trades at 21x FY16E P/E while offering an above-peer ROE of 38%. Normalizing cash market volatility and IPO growth are critical for future earnings, with declining fund flows into Singapore or Asia on a worsening geo-political environment, a Fed rate hike and China slowdown as major downside risks. Policy-induced risk from the launch of CSI300 futures by competitors will affect China A50 volume, while competition with LME, CME, ICE & Eurex would affect commodity derivatives growth.
Source : Deutsche Bank Markets Research