Macquarie Equities Research (MER) hosted an investor lunch with Michael Syn, Head of Derivatives, SGX on 18 March 2015, since then SGX shares have risen 6.7% to trade above $8. MER released a research note on Monday (23rd March) with an ‘Outperform’ rating and a 12-month price target of $8.50, read more for excerpts….
 
Key points – (i) Equity index futures to remain the main revenue driver (ii) FX futures could become meaningful earnings contributor (iii) Current focus in derivatives is on China and India. Overall, MER thinks that the growth of FX futures could accelerate due to higher regulatory pressure. MER shares SGX's confidence on the growth potential of the equity index futures and FX futures.
 
Impact
Equity index futures to remain the main revenue driver – A main concern for investors have been the sustainability of derivatives volume growth, mainly the China A50 futures. SGX believes that the growth potential of China A50 is still immense. SGX’s market share could grow >10x from the current 1-2% to 20%. A 10% market share for the China A50 index futures could be achievable in MER’s view. Based on Feb 2015’s China A50 volumes, and assuming S$1.20 yield per contract, a 5x increase in China A50 contracts would increase FY2014 revenue by 37%, MER estimates.
 
FX futures could become meaningful earnings contributor – Post the lunch meeting, MER is more optimistic on the growth potential for FX futures. FX futures currently contribute approximately 0.2% of revenue, with the potential to increase to 2.0% of revenue in the next 12-24 months MER believes. Post the de-pegging of the Swiss Franc and the events that followed, the FX market has been under higher regulatory scrutiny. Higher regulatory pressure may accelerate the shift of FX derivatives to be cleared by exchanges as future contracts MER believes.
 
Current focus in derivatives is on China and India – China and India’s equity index futures (China A50 and Nifty) and FX futures (US$/CNH and INR/US$) will be the key growth drivers for SGX’s derivatives volumes in MER’s view. These currently account for approximately 12% of 1HFY15 revenues.
 
Earnings and target price revision
No change.
 
Price catalyst
12-month price target: S$8.50 based on a dividend discount model (DDM) methodology.
 
Catalyst: Securities and derivatives trading activities, IPOs, special dividends
 
Action and recommendation
MER has an Outperform rating on SGX – Target Price S$8.50.
 
MER came out more positive from the lunch, especially on the growth potential of FX futures. MER’s high-teens derivatives volume growth forecast for FY2016E-FY2017E could be on the conservative side in MER’s view.
 
SGX will benefit from a structural shift of derivatives to the exchange-traded platform, MER believes.
 
SGX’s ability to generate high operating cashflow and zero debt on its balance sheet is a major support for future dividend payouts of >90%, and dividend yields of >3.5% in MER’s view.

Source: Macquarie Research - 26 Mar 2015