SGX reported 1QFY15 on 21st Oct after market hours, and yesterday the shares jumped 2.5% to close above the $7 level.

Macquarie Equities Research (MER) released a research note on Tuesday (21st Oct) on the SGX. MER currently has an ‘Outperform’ rating and a 12-month price target of $7.80 on the company. Some excerpts from the research note are found below.
 
Event
Key points to note from earnings release – (i) Derivatives volumes can grow from RMB-related interest; (ii) Securities trading activities weak; (iii) Retail investor participation (and securities daily average traded value) could improve marginally with lower board lot sizes.
 
‌Impact
Earnings summary – SGX reported 1QFY15 net profit of S$ 78m (-16%YoY). The decline in net profit was due largely to weaker securities revenue from lower securities trading activities.
 
Weak securities trading activities – Weak Securities Daily Average Value (SDAV) is to blame for the 29% YoY decrease in Securities revenue contribution. SDAV decreased 27% YoY to S$1.0 bn (MER’s full year 2015E SDAV: S$1.3 bn) for the quarter. Penny stocks (below S$0.20 per share) account for S$0.1 bn of the SDAV decrease after trading activities for these penny stocks declined by 66%.
 
Derivatives volumes can grow from RMB-related interest – Competition for Derivatives market share will get stiffer, especially for the RMB-related products, but SGX can benefit from the strong interest in these RMB-related products for now in MER’s view. This includes the recently introduced RMB FX futures, which got off to a strong start with around 3k contracts traded in the last 2 days. Derivatives are increasingly playing a bigger role in profit contributions (32% of total revenue in 1QFY15 vs 30% of total revenue in 2014) – and MER expects this trend to continue. Derivatives Daily Average Volume (DDAV) rose 8% YoY in 1QFY15 to 451k contracts (Macquarie full year 2015E DDAV: 467k contracts), due to growth of China A50 futures and Iron Ore derivatives.
 
Retail investor participation (and SDAV) could improve marginally with lower board lot sizes –MER thinks that liquidity can improve marginally due to higher accessibility for retail investors, in particular for the higher priced stocks, as the minimum board lot size decreases 10 fold.
 
Outlook – The 2015E operating expense guidance (S$330 – S$340m) and technology-related capital expenditure guidance (S$50m – S$55m) were maintained.
 
‌MER’s action and recommendation

• MER maintains its Outperform recommendation – Target Price S$7.80.
• MER sees good potential for SGX from marginal trading value recovery off a low base, >4.0% sustainable dividend yield, and no debt on the balance sheet.

Source: Macquarie Research - 24 Oct 2014