In line with expectations. 1QFY13 reported net profit came in at $74m, which was down 15% yoy against 1QFY12, which experienced one of the strongest SDAV in recent periods. On a qoq basis however, net profit was up 22%. SGX also announced its full-year operating expense guidance at SGD295m-SGD305m, which was welcomed transparency, but overall we do not expect this set of numbers to move the needle in terms of earnings expectation going forward.

ASEAN markets outperforming in terms of SDAV. Compared to other major exchanges such as Hong Kong (-35% yoy), Australia (-31% yoy), London (-32% yoy), we believe SGX had a much better showing in terms of SDAV. The relative attractiveness of ASEAN markets played a part, with ASEAN ex SGX down 17%. This reaffirms SGX’s strategy in trying to promote this bloc via the ASEAN Trading Link, which has now started with Bursa Malaysia and Stock Exchange of Thailand.

Healthy derivatives revenue now a recurring theme. Despite a slight decline in volumes, revenue in this segment was up a steady 5% yoy. This was mainly attributed to better management of collateral balances, in turn from the network effect of more margins being placed in Singapore as the product suites expand. This segment, which made up 28% of Group revenue (vs 36% for securities trading), will remain a key pillar of profitability for SGX going forward.

On the right track. Management remains committed to transforming Singapore’s securities market, via various initiatives such strengthening regulatory and risk management capabilities, raising the bar for listings and investor education. Many of these steps do not yield tangible results, but we believe will put the exchange on a firm path towards establishing a strong competitive niche in Asia.

Earning a dividend while you wait for better times. SGX remains a healthy dividend play, with yields of 4-5% secured by a cashed-up balance sheet and resilient derivatives revenue. An uptick in SDAV will be the main share price catalyst. Maintain BUY with a target price of SGD7.60 pegged at 25x FY6/13F PER.

Source: Maybank Kim Eng Research - 19 Oct 2012