Singapore Exchange

Kim Eng on 27 June 2012

The winner may be the loser. The bidding war for the London Metal Exchange (LME) has ended with the Hong Kong Stock Exchange (HKEx) agreeing to pay GBP1.39b (SGD2.8b) for the world’s largest venue for trading metals-based derivatives. Singapore Exchange (SGX) was widely rumoured to be among the suitors, but with this price tag, we think the winner may actually be the real loser. This deal values LME at 180x PER or 18x P/BV (estimated 60x PER even after LME raise exchange fees next month).

Highlights value of derivatives market. What this deal does highlight is the value of derivatives trading, which has seen a significant upturn in trading volume over the past decade, from 2b to 25b contracts in 2011. SGX has been growing this segment for the past few years and now has a series of metal futures in partnership with LME for trading during Asian hours on its own platform. Unlike fluctuating securities revenue, derivatives revenue saw steady increase for the past 11 quarters.

Staying to steer the ship. SGX recently announced that CEO Magnus Bocker has renewed his three-year contract first signed in December 2009. This is an important development in our view, as it will give continuity to the initiatives implemented since he took office. Many of them, such as retail investor education and tighter rule enforcement, need time to bear fruit.

New mainboard rules for mining companies. SGX has proposed specific mainboard criteria for mining companies, following similar rules for a Catalist listing last year. This may help attract mining companies, especially from Australia, which are seeking access to capital markets in Asia outside of their home country.

Healthy dividend yield, maintain Buy. With a depressed SDAV of SGD1.3b, we believe SGX’s earnings are closer to its bottom baseload, providing a good opportunity for long-term accumulation. Furthermore, with a cashed-up balance sheet, sustainable dividend yield will remain healthy at around 4-5% at current price. Maintain BUY with a target price of SGD7.43 pegged at 25x FY6/13F PER.