Tuesday 27 January 2015

Singapore Exchange

OCBC on 22 Jan 2015

Singapore Exchange (SGX) posted a strong 15.5% YoY rise in 2Q net earnings to S$86.6m, largely boosted by a strong 46% jump in Derivatives Revenue to S$76.4m. Securities Revenue fell 1.1% YoY to S$51.7m. Management indicated that there will be continuous efforts to grow its Derivatives and Fixed Income businesses. As such, technology-related expenditures are projected to increase from the previous guidance of S$50-55m to S$70-75m. Taking into account the better Derivatives contribution, we have adjusted our FY15 net earnings from S$313m to S$336m. We are maintaining our HOLD rating but raising our fair value estimate marginally from S$7.26 to S$7.52.

16% jump in 2Q earnings 
Buoyed by strong contribution from its Derivatives business, Singapore Exchange (SGX) posted a strong 15.5% YoY rise in 2Q net earnings to S$86.6m, resulting in 1H earnings of S$164.2m (down 1.8%). This was largely boosted by a strong 46% jump in 2Q Derivatives Revenue to S$76.4m, which lifted total group revenue to S$195.1m, up 18.6% YoY. However, Securities Revenue remained flat at about S$51.7m, down 1.1% YoY. This accounted for 26% of total revenue versus 39% for Derivatives. Although Securities daily average traded value (SDAV) rose marginally by 4% to S$1.04b, the drag came from lower average clearing fee, which fell from 3.1bps to 3.0 bps. Under Derivatives, several futures contracts saw meaningful double-digit growth including the FTSE China Index Futures which saw an almost tripling to 17.45m contracts. 

Building up Derivatives and Fixed Income businesses 
Management indicated that there will be continuous efforts to grow its Derivatives and Fixed Income businesses. This will require more investment into technology and capital expenditures are projected to increase from the previous guidance of S$50-55m to S$70-75m for this year. For its operating expenses, management is expecting this to go up from S$330-340m to S$360-370m. 

Challenges and opportunities 
This quarter got off to a rocky start with the surprise SNB action, the Kaisa Group loan default, low oil prices, etc. This marks a period of uncertainty ahead. Volume on the local bourse has also come off slightly from an average of 2.02b in 2014 to about 1.56b for the first few weeks of Jan 2015. While volatility is likely to persist in the first half of 2015, stability in the local bourse could also present opportunities for investors looking for stable core holdings. On the derivatives side, strong momentum is likely to remain in view of the volatility. We have revised slightly our FY15 numbers, bringing net earnings from S$313m to S$336m. However, SGX’s share price has recovered well from the lows in mid-Oct 2014, and at current price, we are maintaining our HOLD rating and raising our fair value estimate marginally from S$7.26 to S$7.52 at 24x FY15 earnings.

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