• Derivatives to drive growth
• 3-pronged business strategy ahead
• Upgrade to BUY

Better than expected results

Singapore Exchange (SGX) posted a 28% YoY or a 3% QoQ increase in 1QFY16 net earnings to S$99.3m, higher than market expectations of S$90.3m (based on a Bloomberg consensus estimate). Derivatives remained the star performer, with a 69% YoY and 6% QoQ jump in revenue to S$90.9m. This was led by a 67% gain in equities and commodities derivatives revenue to S$67.1m. The SGX FTSE China A50 Index futures saw a 164% YoY rise in volume to 28.4m contracts. Securities saw a 14% YoY and flat QoQ revenue of S$55.9m. Securities Daily Average Traded Value (SDAV) grew 27% YoY to S$1.23b, while the SDAV of STI stocks jumped 61% to S$0.88b. With the change in base dividend policy, this quarter’s payout increased from 4 cents to 5 cents. Ex-date is 27 Oct and payment date is 5 Nov 2015.

New CEO outlined business strategy

For his maiden result briefing, CEO Loh Boon Chye outlined his strategy to grow the market for currency futures, develop SGX as the regional fixed income platform and grow the market data and index business. While the currency futures segment is already part of its existing business, SGX is looking to expand it. For the fixed income platform, it will be launching the SGX Bond Pro trading platform targeting Asia’s wholesale bond trading market (from listing and trading to clearing and settlement).

Maintain FV of S$8.16; upgrade to BUY

With investments into staff and technology, SGX is guiding for operating expenses of S$425m to S$435m and technology-related capital expenditure of S$75m to S$80m in FY16. We expect continuous volatility in the Asian market in the coming months and with slower corporate activities and M&As, this will result in a muted outlook for equities and lackluster securities trading. The key driver will continue to be SGX’s derivatives business, and we are expecting a 25.5% increase in derivatives revenue in FY16. We are retaining our fair value estimate of S$8.16 but as its share price has come off since our last report, at current level and on valuation grounds, we upgrade SGX to a BUY.

Source: OCBC Research - 22 Oct 2015