• Weakness in both Securities and Derivatives
• Cutting expenses and capex
• Drop FV to S$7.06

Challenging environment; drop in securities and derivatives revenue

Due to a very tough environment in 2QFY16, Singapore Exchange (SGX) posted a 3% YoY and a 15.7% QoQ drop in net profits to S$83.7m. As expected, the sharp downturn in the market had a severe impact on its Securities business, which was a main drag on the group’s performance, with revenue down 9.8% YoY to S$46.6m or contributing about only 24% to total group revenue.

Adding to this was the 14.7% QoQ drop in its Derivatives revenue to S$77.6m – a business that has seen average revenue of S$85m per quarter in the past three quarters. Securities Daily Average Traded Value (SDAV) fell 11% to S$0.93b, while total traded value dropped 9% to S$59.5b. A dividend of 5 cents was declared, with book closure date on 28 Jan and payment date on 4 Feb 2016.

Cost cutting to ride current tough environment

Against a weak market environment, management is going to focus on managing cost. In this respect, FY06 operating expenses are now projected to be in the range of S$415m to S$425m versus the earlier guidance of S$425m to S$435m, down about S$10m-S$20m.

For its technology-related capital expenditures, this has been cut from a range of S$75m to S$80m to a lower level of S$70m to S$75m, down about S$5m-S$10m. When implemented together, this could mean lower costs of between S$0mS$30m.

Lower FV due to decline in valuations of regional peers

With the current market rout and the lack of key price drivers, due to the slowdown in China, sharp drop in oil prices and the impact on investor confidence, this has led to an increase in risk aversion. In addition, market and equity valuations have come off sharply.

Taking into account the weaker market conditions, we have lowered our FY16 and FY17 earnings estimates and using the current lower valuations of its regional peers, we are cutting our fair value estimate from S$8.16 to S$7.06 (21x FY16 earnings). With a dividend yield of 4.2% and total return of slightly >10% to our FV, we are maintaining our BUY rating.

Source: OCBC Research - 21 Jan 2016