SGX announced their second quarter results last night which showed that net profit was down 2% from a year earlier. Macquarie Equities Research (MER) released a research report shortly after retaining its ‘Outperform’ rating on the stock and a 12-month price target of $7.87 (+12.4% from previous close).
 
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Event
SGX missed MER’s forecast by 14% for FY2Q14. However, MER thinks the number is not out of line with market expectations given the zombie-like cash market activity during the quarter.
 
Impact
In a note by MER previously on Asian derivatives markets and implications for regional exchanges, MER highlighted that the low cash equities turnover in Oct-Jan created downside risk to MER’s S$87m forecast for FY2Q14, so the miss was not a huge shock. Moreover, Bloomberg suggests a consensus mean of S$71m, and the actual number was 6% higher.
 
This quarter marks the first in which the revenue contribution from the derivatives business was similar to that of the securities market. In particular, trading volumes of China A-50 contracts (+20% QoQ / +55% YoY) were strong, while Nikkei futures (+1% QoQ / +11% YoY) showed signs of slowing momentum but remain at a relatively high level vs history.
 
Operating costs fell marginally QoQ due to lower staff variable bonus, but was up 6% YoY on higher depreciation expenses from the new risk management system. Technology-related capex is set to continue in the near term as SGX works to meet new regulatory requirements and enhance its product offering capabilities.
 
Price catalyst
MER has a 12-month price target of S$7.87 based on a fair value average methodology.
 
MER’s view is that revenue diversification should allow the stock to “decouple” from its high correlation with trading volumes on the cash equities market. The future in derivatives trading and clearing is still bright.
 
MER’s action and recommendation
Low cash equities turnover in Oct-Jan aside, MER still likes SGX and retains its Outperform rating on the stock. MER sees SGX as the most diversified exchange in Asia-ex Japan and retains it as MER’s top pick.

Source: Macquarie Research - 23 Jan 2014