SINGAPORE Exchange's (SGX) open interest and derivatives trading volumes were at a record high in Q2 2013. However, the rise in derivatives revenues was lower than the volume increase, due to the shift in product mix to those which carry low yields.
Collateral management was less q-o-q, which led to lower interest income. Although securities daily average volumes increased q-o-q, lower average trading values led to softer securities revenues. This was mainly due to higher proportion of capped trades (which carry lower effective rates) at 58 per cent of total trades during the quarter.
Slight improvement in other revenues arose from clients migrating to low-latency SGX market data feed and from migration of securities-clearing and depository systems, which had enhanced efficiency.
Issuer services were lower in line with slower market activity (fewer corporate actions).
Operating expenses were a tad lower, mainly due to lower royalties for some derivatives products. Staff costs were higher, in line with profit growth. Capital expenditure would be closer to $30 million for FY2013, while depreciation charges stabilised with infrastructure in place.
SGX's ample capital and debt-free balance sheet position it well to meet new global regulatory requirements.
As usual, SGX declared a four Singapore cents base dividend per share for the quarter. That said, with major uncertainties removed from the market, we believe that market activity would pick up this year.
Securities daily average values for YTD FY2013 averaged at $1.3 billion, which is on track with our forecast of $1.4 billion.
IPO pipeline remains strong but execution remains a risk. The key challenge remains its ability to improve velocity and garner higher retail participation.
Maintain "hold". The $7.25 target price, which is based on dividend-discount-model, is equivalent to 21 times CY2013 EPS.
Current valuations are not enticingly attractive, but we believe that downside should be limited and supported by decent dividend yields of 4 to 5 per cent.
HOLD
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