■ Share price correction
■ FV lower to S$7.89
Breaking up is hard to do…
In the last few months, the National Stock Exchange of India (NSE) has been battling with the Singapore Exchange (SGX) over Indian derivatives (refer to Exhibit 1 for the recent chain of events and more details). This has taken a toll on SGX’s share price. At the high this year, the stock was trading at S$8.50, but has since dropped to as low as S$7.10, down S$1.40 or 16.5%. In terms of market capitalization, this was stark as some S$1.5 billion were wiped off from its market capitalization.
Negatives have been priced in
As this continues to play out in the coming weeks, the outcome is unlikely to be clear, but the share price has clearly reflected most of the negatives and the potential hit on SGX’s bottomline, if the sharp decline in market capitalization is any indication. However, we are of the view that the correction is overdone and has more than priced in the potential hit on its earnings.
We are keeping our FY18 earnings largely intact, but have revised our FY19 earnings to take into account the potential hit to its derivatives business. At the last result (for 9-month FY18), derivatives accounted for about 40% of group revenue (versus the average of 30% from FY10-17). For the same period, SGX delivered net earnings of S$292m to S$349m or an average of S$325m per year. With fairly stable core earnings, a committed dividend payout of 28 cents per year, and at current price of S$7.24 as at 31 May 2018, this means a good dividend yield of 3.9% from a debt-free company. With the adjustment to our FY19 forecasts, and using the same valuation of 23x earnings, our fair value estimate drops from S$8.22 to S$7.89.
Source : OCBC Investment Research