SGX announced its second quarter 2015 earnings after market hours yesterday, posting its first quarterly profit growth in more than a year after an increased demand for derivatives. The shares saw a 1.5% rally during the trading session yesterday as the STI added just 0.6%.

SGX’s earnings saw a 16% increase year on year as Macquarie Equities Research confirmed its ‘Outperform’ recommendation and increased its 12-month target price to $8.50. Excerpts can be found below…
 
 
Event
Key points and conclusion – (i) Record contributions from derivatives business, (ii) SGX can leverage off potentially higher derivative trading activities in Singapore with the launching of Intercontinental Exchange (ICE) and Deutsche Boerse AG (DB1), (iii) securities trading activities were weak but should improve from here. Overall, MER sees good potential for derivatives to continue being a key revenue driver for SGX.
 
Impact
Earnings summary – In 2Q15, SGX reported a net profit of S$86.6m (16% YoY and 12% QoQ), which is slightly above MER’s estimate of S$85.0m.
 
Record S$52m adjusted contribution from derivatives – The increase in derivatives volume in the quarter was event-driven, mainly in the China A50 futures, in MER’s view. What would get MER more excited, however, would be the structural shift of derivatives to the exchange-traded platform, which could happen gradually in the next 12 to 18 months. Exchange-traded products benefit from higher cost efficiencies for investors.
 
Potentially more trading activities from two new clearing houses in Singapore – While competition is now higher, SGX can leverage off potentially higher trading activities brought about by ICE and DB1, MER believes. ICE is slated to launch its Singapore-based derivatives business in March 2015, and now DB1 may potentially also launch its derivatives business here in 2016.
 
Securities contribution to improve from here – MER continues to see good potential for higher securities revenue as retail participation increases from a low base. However, given the weaker 1H15 performance, MER tones down its securities daily average value (SDAV) assumptions for 2015.
 
MER’s earnings and target price revision
MER adjusts its earnings per share estimates by -3% for 2015, +1% for 2016 and +2% for 2017 to reflect weaker securities trading activities in 2015E but stronger growth of derivatives trading activities. MER increases its target price to S$8.50 from S$8.00.
 
Price catalyst
12-month price target: S$8.50 based on a DDM methodology.
 
Catalyst: Securities and derivatives trading activities, IPOs, special dividends.
 
MER’s action and recommendation
MER has an Outperform recommendation on SGX – Target Price S$8.50.
SGX will benefit from a structural shift of derivatives to the exchange-traded platform, MER believes. SGX can also leverage off potentially higher derivatives trading activities in the Singapore trading time zone, as Singapore increasingly becomes the Asian financial hub for derivatives trading activities, in MER’s view.
 
SGX’s ability to generate high operating cashflow and zero debt on its balance sheet is a major support for future dividends payment, in MER’s view. Furthermore, SGX’s pricing power on its clearing fees and monopoly of the securities business in Singapore is another positive, MER believes.

Source: Macquarie Research - 22 Jan 2015