SGX announced its fourth quarter 2015 results on Wednesday (29th July) and the shares plunged 2.4% yesterday. Macquarie Equities Research (MER) released a research report on the date the exchange released its earnings (29th July), maintaining an ‘Outperform’ rating on the stock, with a 12-month price target of $10. MER’s price target is 24.5% higher than SGX’s closing price yesterday. Read on for more excerpts….
 
Event
Key points: (i) Strong derivatives but weak securities trading activities, (ii) A50s to ride on volatility and positive China equities (iii) Management is optimistic and expects healthy revenue growth.
 
Impact
Earnings summary – In 4QFY15, SGX reported net profit of S$96m (24% YoY, 9% QoQ), broadly in line with consensus of S$98m. Average derivatives fee per contract of S$1.24 (-18% YoY, -19% QoQ) was however lower than expected. This suggests profitability of incremental A50 future volumes could be low. Full year dividends of S$0.28 missed MER’s expectation of S$0.30.
 
Strong derivatives, weak securities – In 4QFY15, Derivatives daily average volume of 863k contracts (28.1% QoQ, 109.7% YoY) performed exceptionally well, beating MER’s bullish estimates by >30% for the quarter. Securities daily average value of S$1,198m (2.4% QoQ, 6.5% YoY) was again disappointing, missing MER’s estimates by 4% for the quarter.
 
A50s to ride on volatility and positive China equities – In FY2015, A50s account for 50% of total derivatives volume, and contribute ~10% of group revenue MER estimates. Further changes to government policy (continued RRR cuts, interest rate cuts, aggressive fiscal spending) would be a positive for China equities market, MER believes.
 
Outlook and guidance: Management was optimistic about business prospects, expecting healthy growth of revenue. This would be driven mainly by derivatives, while securities is expected to remain weak. SGX guide for FY2016 opex of S$425m-S$435m (FY2015: S$377m), which is higher than MER’s expectations. This would mainly be due to higher variable derivatives cost, staff cost, and higher tech cost. Cost/income ratio is expected to be flat or slightly negative, from healthy revenue growth (implied revenue growth: ~15% YoY). FY2016 capex was guided to be S$75m-S$80m (FY2015: S$75m).
 
MER’s earnings and target price revision
No change.
 
Price catalyst
12-month price target: S$10.00 based on a dividend discount model (DDM) methodology.
 
Catalyst: A50 index volatility, regulatory changes, initiatives by new CEO, news flow on Singapore-China stock connect
 
MER’s action and recommendation
MER maintains its Outperform rating on SGX – target price S$10.00.
 
MER expects SGX to benefit from higher China A50 futures volumes, driven by volatility and positive China equities. 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 >80%, and dividend yields of >3.5% in MER’s view.

Source: Macquarie Research - 31 Jul 2015