Highlights

Securities Daily Average Value (SDAV) has recovered for 2Q15 by 7.7% q-q to S$1.04bn despite the seasonally quiet quarter, a strong suggestion that the securities market is inflecting and gradually recovering even while several macro indicators are looking bleak. We expect the run rate to continue with this recovery and FY16E SDAV at S$1.2bn.

Derivatives business was stellar with DDAV leapfrogging 41.8% q-q to 0.61m contracts, an all-time historical high! This supports our long-standing thesis of derivatives being the key growth driver in the medium term. Key engine pistons were the FTSE China A50 and Nikkei 225 contracts (+61.9%/+47.7% q-q).

SGX had been largely unappreciated by the market for the better part of 2014. We believe that with securities market volumes turning around, swelling derivatives volume and SGX’s unique position in the market, earnings recovery has arrived and it is time to load back into SGX.

Upgrade to “BUY” with revised TP of S$8.35, based on upward revised EPS and PE multiple of 24X FY15 earnings

What is the news?

SGX Ltd will be announcing its 1Q15 results on 21 Jan 2015. Based on monthly statistics recently released by SGX, 2Q15’s SDAV increased 7.7% q-q to S$1.04bn. DDAV ballooned in 2Q15 by 41.8% q-q to 0.61m contracts.

How do we view this?

We expect Securities Revenue to improve as SDAV has grown by 7.7% q-q. The board lot size reduction to 100 this month also suggests higher retail interest especially in blue chip counters. We observe that despite a seasonally weaker quarter and bearish macro indicators in 2Q, SDAV has indeed recovered slightly and we expect this momentum to carry into FY16.

Derivatives Revenue should shine this quarter with the all-time historical high DDAV of 0.61m, a 41.8% surge q-q. Key drivers were the FTSE China A50 Index Futures (+61.9%) and Nikkei 225 Index Futures (+47.7%). The A50 contracts now constitute 48.4% of total equity index futures volume. We continue to believe in A50 and Nikkei 225 driving derivatives volume with the opening up of China and BOJ’s loosening monetary policy. To add the icing to the cake, the A50 contracts market share was only 1.4% in 1Q15, providing ample room for growth in market share! Previously we noted that forex futures are gradually taking off along with RMB forex futures soundly complimenting RMB-denominated products. Indeed, 2Q15 saw a 206% jump in forex futures volume. Another contract in the pipeline worth noting would be the Iron Ore futures which also grew 193% q-q. All in all, these are factors that cement SGX’s position as a derivatives powerhouse.

Investment actions?

Since our last upgrade to “Accumulate” on 15 th October 2014, SGX’s share price has increased ~13%. We increase our FY15/FY16 EPS estimates by 9%/12% (10%/9% above consensus) to factor in higher SDAV and DDAV which are indicators of an earnings recovery. Based on a multiple of 24X FY15 earnings, our target price is revised to S$8.35 and we upgrade our rating to “BUY”.

Source: Phillip Securities Research - 9 Jan 2015