Singapore Exchange

Kim Eng on 30 Jul 2012

In line with expectations. FY6/12 reported net profit came in at $292. Underlying net profit of $304m was down only 3% yoy, which we believe reflects a commendable set of results given the challenging market conditions. Management proposed an unchanged final dividend of SGD 15 cents/ share (full year unchanged at SGD 27 cent/ share), which represents a 99% payout.

Derivatives revenue held up performance. SDAV fell from %1.6b to $1.3b for the year, which was a familiar story for most exchanges around the world. As a result, securities revenue declined 16% yoy. Results were again held up by derivatives revenue, which were up 18% yoy. This segment posted another record quarter and has now shown steady growth over the past 12 quarters. Derivatives now account for 26% of total group revenue vs Securities which contribute 38%.

Good cost control was another factor. Operating expenses were kept under control, declining 1% in line with the revenue decline. Between FY10-FY12, there were significant investments in new systems, which we believe has come to the end of a cycle. Importantly, we believe the lower capex going forward ($30-$35m per annum guidance) will be conducive for generous dividend payouts.

Partnerships may be a better avenue than M&As. Going forward, we expect management to continue pursing organic initiatives as well as partnerships with other exchanges to grow. SGX recently signed a memorandum of understanding with the London Stock Exchange (LSE) to enable cross-trading of their most actively traded stocks. Management believes this platform, will make both exchanges more attractive for companies seeking a listing.

SDAV at cyclical lows, maintain BUY. We believe SDAV is currently at cyclical lows. An uptick in trading volumes, combined with a growing derivatives business will bring SGX earnings to greater heights. With a cashed-up balance sheet, we believe sustainable dividend yield will remain healthy at around 4-5% at current price. Maintain BUY with a target price of SGD7.50 pegged at 23x FY6/13F PER.