• 2Q earnings above market expectations
• Cutting FY14 forecasts
• Dropping FV to S$7.22

2QFY14 earnings above consensus

Singapore Exchange (SGX) delivered 2QFY13 net earnings of S$75.0m, down 1.8% YoY and 18.8% QoQ. This is higher than market consensus of S$71m based on Bloomberg. While the softness in its Securities business was widely expected based on trading activities and market conditions (down 12.7% YoY and 24.3% QoQ to S$52.2m), SGX’s overall performance was lifted by higher Derivatives Revenue, up 15.9% YoY or 1.5% QoQ to S$52.5m. Derivatives Revenue is now on par with Securities Revenue. An interim base dividend of 4 cents has been declared.

Derivatives mitigated softness from Securities

2QFY14 was the lowest net profit in the last five quarters, largely brought on by the lowest Securities Revenue in recent history. Its overall performance was aided by higher Derivatives Revenue, which experienced revenue growth from most key contracts as the total number of traded contracts grew 18% YoY to 26.3m in 2QFY14. In particular, the Japan Nikkei 225 futures (+11%), China A50 futures (+55%), Nikkei 225 options (+57%) and the Ire Ore swaps (+64%) did well in the quarter.

Challenging quarter ahead; cut FV to S$7.22

We expect 3QFY14 to be no less challenging than the previous quarter for its Securities business. Among some of the key concerns is our expectation of weaker property data ahead and this could curtail trading interest in property and property-related stocks in the quarter. We have adjusted our estimates and cut our FY14 projected net earnings to S$336.1m, at the lower end of the market range. We have also cut our fair value estimate from S$7.43 to S$7.22 to reflect reduced near term share price drivers. This also puts our fair valuation near the lowest end of street estimates. However, we expect the 28 cents dividend payout to be maintained, giving a yield of 4% at current price. We are maintaining our HOLD rating.

Source: OCBC Research - 23 Jan 2014