Securities Daily Average Value (SDAV) saw a slight recovery of 3.5% q-q to S1.125 but trade volumes remain suppressed with SDAV down 30.1% y-y based on SGX figures. Securities activity levels are persistently lower than expected and we see limited drivers in the near-term, leading us to revise our FY15 forecasted SDAV downwards.

The “SGX Market Maker and Liquidity Provider Programme” has been available since 1 Jun 14. Market makers and liquidity providers are incentivized through clearing fee rebates and depending on if they are price-taking/making in nature. Rebates can potentially reduce clearing fees to zero for market makers (more stringent criterions and commitment) and up to 75% for liquidity providers. In our view, this would likely boost liquidity and encourage trade volumes but success hinges on the number and quality of market participants. Other micro-structural changes like board lot size reduction would also compliment this programme in our opinion.

Derivatives Daily Average Volume (DDAV) has shrunk by 8.9% q-q to 0.412 million contracts and 20.2% y-y from an exceptionally strong 4Q13.

Maintain at “Neutral”, with a revised Target price of S$7.45 based on revised EPS and PE multiple of 23X FY14 earnings as we roll over our valuations to FY15.

What is the news?

SGX Ltd will be announcing its FY14 results on 30 Jul 2014. Based on monthly statistics recently released by SGX, 4Q14’s SDAV recovered 3.5% q-q to S$1.125 billion. DDAV shrunk in 4Q14, decreasing 8.9% q-q to 0.412 million contracts.

How do we view this?

We expect Securities Revenue to pick up as SDAV has recovered marginally and retail versus institutional mix has been more weighted on retail (67%) implying that clearing fees could be higher q-q. Derivatives Revenue could be slightly lacklustre with the dip in DDAV. The q-q softening in DDAV was largely due to the FTSE China A50 Index Futures (-6.0%) and Nikkei 225 Futures (-26.5%) but mitigated by an increase in the Nifty Index Futures (+16.6%) possibly due to the India elections. For FY14, 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 especially so for US and China, securities activity levels are persistently subdued which pose as a near-term headwind for SGX. Potentially, the introduction of market makers and liquidity providers could serve to increase market volumes but gestation length is unclear at such an early stage . The lack of near-term catalysts to alleviate the low SDAV levels has led us to trim our EPS forecast. We continue to expect the Derivatives business to be a key growth driver in the medium to long term until micro-structural changes in the securities business succeed in lifting volumes. Key re-rating catalyst will be a sustained pick-up in market volumes from external macro drivers and the success of the SGX introduced measures for boosting liquidity, IPOs and take-off of new derivatives products launched.

Investment Actions?

We revise our FY14 EPS estimates downwards by 3% to S$0.30 and FY15 and FY16 EPS by 6% and 5% respectively. As we rollover our valuations to FY15, we derive a revised TP of S$7.45 and maintain our rating at “Neutral”.

Source: Phillip Securities Research - 7 Jul 2014