• Securities Daily Average Value recovered marginally by 8.5% q-q to S$1.087 billion but deflated 37.4% y-y based on SGX figures. Persistently lower than expected securities activity level for financial year till date led us to revise our full year forecasted SDAV downwards.
• Derivatives Daily Average Volume grew marginally by 7.1% q-q to 0.452 million contracts but softened slightly by 5.8% y-y. Derivatives volume expected to increase further, but at a gradual pace.
• Downgrade to “Neutral”, with a revised Target price of S$6.89 based on revised EPS and PE multiple of 23X FY14 earnings.

What is the news?

SGX Ltd will be announcing its 3Q14 results on 23 Apr 2014. Based on monthly statistics recently released by SGX, 3Q14’s SDAV recovered 8.5% q-q to S$1.087 billion. DDAV also grew slightly in 3Q14, increasing 7.1% q-q to 0.452 million contracts.

How do we view this?

We expect Securities Revenue to remain largely at similar levels q-q as SDAV has only recovered marginally and retail versus institutional mix is about the same as well. Derivatives Revenue is expected not to surprise as well with the marginal recovery in DDAV which was more concentrated around the continued momentum in FTSE China A50 Index Futures and increase in the Nifty Index Futures. For the financial year till date, the key drivers continue to be heavily centred on the Nikkei 225, FTSE China A50, MSCI Taiwan Index and Nifty index contracts.

While we expect SDAV and DDAV to pick up in FY15 and FY16 with recoveries in some major markets and the positive macro outlook for Singapore, the persistently weak securities activity levels continue to pose a near-term headwind for SGX. As mentioned in our previous report, the penny stock saga together with the proposed regulatory changes would dampen retail interest in the near term. The continuously low SDAV levels have led us to reduce our FY14 SDAV forecast to S$1.2 billion and our forecasts for FY15 and FY16. We continue to expect the Derivatives business to be a key growth driver in the medium to long term. Key re-rating catalyst will be a sustained pick-up in market volumes, IPOs and take-off of new derivatives products launched.

Investment Actions?

We revise our FY14 EPS estimates downwards by 6% to S$0.30 and FY15 and FY16 EPS by 8% and 5% respectively. Based on a revised multiple of 23X FY14 earnings, we derive a revised TP of S$6.89 and downgrade our rating to “Neutral”.

Source: Phillip Securities Research - 8 Apr 2014