Singapore Exchange

OCBC on 30 Jul 2012

Singapore Exchange (SGX) delivered 4QFY12 net earnings of S$61.1m or FY12 earnings of S$291.8m, and these were slightly below market expectations. While Securities Revenue fell 15.5% to S$244.1m in FY12, this was mitigated by an 18% rise in Derivatives Revenue to S$167.5m. Base dividend payout was unchanged at 4 cents for the final quarter with a variable of 11 cents. Recently, the SGX announced several new initiatives and this included higher admission criteria for Mainboard listing, revised bid-ask spreads, enhancing ETF suite, emphasis on retail investor education and participation. More initiatives are expected in FY13. We are expecting the outlook for global equity markets to remain fairly muted, and this will continue to be a drag on SGX’s performance. We are lowering our fair value estimate from S$7.00 to S$6.80. Maintain HOLD.

Results were slightly below market expectations
With the uncertainty in most markets, this has been dampened investor confidence and dragged down the full-year performance of the Singapore Exchange (SGX). SGX posted 4QFY12 net earnings of S$61.1m, down 23% YoY, resulting in a 1.1% drop in FY12 earnings to S$291.8m. This was slightly below market expectations, which was going for full year net earnings of S$301m. Securities Revenue fell 15.5% to S$244.1m in FY12, and this was fortunately mitigated by an 18% rise in Derivatives Revenue to S$167.5m. As a result of this, Securities Revenue now accounted for 37.7% of revenue versus 46.3% in FY10, while Derivatives Revenue rose from 20.5% to 25.9% for the same period. The final base dividend remained unchanged at 4 cents for the last quarter with a variable and also unchanged dividend of 11 cents, making full year payout of 27 cents (same as FY11). Management has reiterated its commitment to the 16 cents per year base dividend payout.

Many initiatives in the pipeline; capex of S$30-35m
SGX has also announced several new initiatives recently and these included higher admission criteria for Mainboard listing, revised bid-ask spreads, enhancing ETF suite of products and emphasis on retail investor education and participation. Going into FY13, more initiatives have been planned and this will include RMB trading and clearing, ASEAN trading link, expand GlobalQuote (LSE-SGX), etc. Capex in FY12 was S$41m (vs. S$57m in FY11) and went into several items including the migration of the Securities Clearing & Depository Systems as well as Pre-trade Risk Control for Derivatives. For this year, management is looking at even lower capex guidance of S$30-35m.

Maintain HOLD; drop FV to S$6.80
While there are more initiatives ahead, global market conditions remain weak and this will mean that most of these measures will not lead to immediate results. We are expecting the outlook for global equity markets to remain fairly muted, and this will continue to be a drag on SGX’s performance, and it has also been shown with the recent delay in some IPOs due to lower valuations. Overall, we are expecting muted growth in FY13 with some support coming from its derivatives business. We have lowered our valuation peg to reflect the more cautious environment from 25x to 23x earnings, dropping our fair value estimate from S$7.00 to S$6.80. The stock is yielding about 4.1% at current price. Maintain HOLD.