SGX announced results after market hours on Wed (22nd April), showing that third quarter 2015 net profit was up 16% year on year (yoy). Macquarie Equities Research (MER) released a research report shortly after, revising its 12-month price target to $10, up from $8.50. MER reiterates its rating of ‘Outperform’ on the counter.

Event

SGX published 3QFY15 results on 22 April 2015.
Key points: (i) Derivatives volumes have been more positive than MER’s optimistic forecast, (ii) Derivatives momentum to remain very strong and (iii) Singapore-China stock connect still a possibility.

Impact

Earnings summary – In 3QFY15, SGX reported a net profit of S$88m (+16% YoY, +2% QoQ), which is broadly in-line with MER’s estimate of S$86m. Derivatives revenue was strong for the quarter, and now accounts for 40% of total revenues in 3QFY15 compared to just 32% a year ago.
 
Derivative momentum to remain very strong – The daily average China A50 futures has increased around 30% MoM to 415k contracts since 8 April 2015 (when southbound trades from China to Hong Kong skyrocketed) to date, MER estimates. China A50 futures volumes account for around 11% of total 3QFY15 revenues, MER estimates. MER thinks volumes of the China A50 futures will remain strong in the near term, and further increased its estimates accordingly. Volatility in the China market should continue to drive trading volumes. This is due to potential changes in government policies that could prolong the rally in the China equities market.
 
Singapore-China stock connect still a possibility – MER thinks that this is still a possibility – should SGX push for it to happen. China is open to expanding the stock connect beyond Hong Kong, based on press articles. Besides Taiwan, Singapore would be another market that could contribute to the liberalisation of China's market, MER believes.
 
Earnings and target price revision
MER increases its earnings per share (EPS) estimates by 2%-4% for 2015E-2017E, mainly by assuming higher derivatives contribution. MER rolls forward its valuation and lifts its target price to S$10.00 from S$8.50.

Price catalyst

12-month price target: S$10.00 based on a DDM methodology.
Catalyst: Newsflow on Singapore-China stock connect, new CEO, regulations

MER’s action and recommendation

MER maintains its Outperform rating on SGX – target price S$10.00.
 
For now, MER expects SGX to benefit from higher A50 futures volumes from increased volatility in China. Structurally, SGX will continue to benefit from a 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 more than 90%, and dividend yields of more than 3.5% in MER’s view.

Source: Macquarie Research - 24 Apr 2015