Singapore Exchange

Kim Eng on 23 Jan 2013

No major surprises. 2QJune13 results were broadly in-line with expectations. Net profit for the quarter came in at SGD76.3m, which is up 17% yoy, bringing 1st-half to a 2% decline yoy. Quarterly dividend
remains at SGD4 cents/ share. We continue to believe the market has under-estimated the potential of SGX, and expect to stock to continue outperforming over the next twelve months.

Revenue growth, cost control. Overall revenue grew 9% yoy, with derivatives a key driver. Securities revenue also grew 9% on higher SDAV. While the potential conclusion of a high-profile bidding saga may result in a marginal decline in trading volume, we believe it is positive longer-term, as it clearly signals that quality companies listed on SGX can be acquired. Management also showed great cost control, with
operating expenses only up 4% yoy.

Traction on derivatives may be understated by revenue. Derivatives revenue grew 21%, but we think even this encouraging pace may be understating underlying development of SGX’s business. Total contracts during the period grew 30% yoy, driven by China A50 futures. Another indicator is the amount of open interest contracts, which was up 83% yoy. This represents increasing stickiness of counter-parties and clients who are choosing to manage their risk overnight with SGX and will drive future revenue further.

Regulatory developments to benefit. We believe new Basel rules on banking capital requirement will play into SGX’s favor, as will new international regulatory and risk management standards. Management is confident of being among the earliest exchanges/ clearing houses globally to meet them. Part of it stems from SGX’s ample capital deployed into its clearing houses and a debt-free balance sheet.

Expect re-rating on consistent earnings. Given its decreasing reliance on securities revenue (36% of Group vs 25% for derivatives), we believe SGX should be re-rated. We maintain our SDAV assumptions of SGD1.4b for FY13F, but peg our TP of SGD8.80 to a higher 29x FY13F, 1-standard deviation above mean. Maintain BUY.