• SGX has kicked off the year with a muted but expected set of results with 1Q15 net profit of S$77.6m and Total revenue of S$168.9m.
• Total revenue and operating profit was in line with our expectations but net profit for the quarter beat expectations slightly by ~8% due to a tax writeback of S$3.2m
• Securities average clearing fee was 3.1bps, lower than expected which is a positive as it translates to participation of the MMs and LPs (21 currently)
• Derivatives revenue was up 3% q-q on stronger volumes, driven by the China A50 contracts as we had mentioned in our report last week
• Interim dividend of 4 cents per share proposed, unchanged from prior year
• Maintain “Accumulate” with unchanged TP of S$7.30, PE multiple of 23X FY15 earnings

What is the news?

SGX Ltd announced 1Q15 underlying net profit of S$77.6m, flat q-q and down 16% y-y. Total revenue declined by 2% q-q and 8% y-y to S$168.9m. Management has maintained guidance for both FY15 Opex of S$330m-S$340m, and technology-related Capex of S$50m-S$55m. An interim dividend of 4cents per share has been proposed.

How do we view this?

In line with our previous report earlier last week, securities revenue declined 8% and derivatives revenue grew 3%. 1Q15 net profit beat our expectations on a tax writeback of S$3.2m and forms ~23% of our FY15 estimates. The record low SDAV that we observed is attributed to the low volatility in our securities market. SDAV for stocks below S$0.20 suffered the worst, declining 64% y-y but for stocks above S$5, SDAV improved 6% y-y. We had previously been optimistic on the MMs and LPs improving liquidity and market depth, management has indicated that this has been observed for the 70 eligible securities. 12% of SDAV is attributed to the MMs and LPs (21 currently) and this is also seen from the 3.1bps of average clearing fee (compared to 3.25bps). Derivatives revenue growth was driven by the phenomenal growth in the FTSE China A50 Index Futures. We had expected that derivatives revenue would overtake securities revenue previously and for this quarter, derivatives revenue forms 32% of topline while securities revenue forms 29%.

Investment Actions?

Our EPS estimates remain unchanged and dividend yield is currently attractive at 4.4%. Based on a multiple of 23X FY15 earnings, our target price is unchanged at S$7.30 and we maintain our rating at “Accumulate”.

Source: Phillip Securities Research - 23 Oct 2014