• Revenue grew 3%
• But expenses rose 7%
• Raised FV to S$7.40

Below expectations 3Q

Singapore Exchange (SGX) posted a 1% YoY rise in 3QFY16 net profits to S$89.2m, below Bloomberg consensus expectations of S$94.25m. Total revenue grew 3% to S$205.8m. Securities Trading and Clearing revenue rose 4% to S$54.8m, forming 27% of total revenue. Derivatives revenue rose 3% to S$82.2m, and accounted for 40% of total revenue.

Due to a decline in new bond listings and a drop in corporate actions, Issuer Services revenue fell 5% to S$18.7m, or 9% of total revenue. A dividend of 5 cents was declared and payable on 6 May 2016. Management expects FY 2016 operating expenses to come in at the lower end of its guidance of S$415m-S$425m (same as last quarter) and with technology-related capital expenses at S$70m-S$75m.

Re-emphasizing cost cutting

Against a challenging global market condition, the 3Q performance was deemed to be fairly healthy even though it was below market expectations. On a YoY basis, revenue improved for almost all units, except issuer service. However, this was mitigated by higher expenses, which rose 7% YoY. The key increases came from headcount and new systems. With increased competition and continued volatile market conditions, cost management appears to be a key focus.

Downgrade to HOLD

As the 3Q results were largely in line with our expectations, we are keeping our FY16 net earnings of S$360m. We are also retaining our FY17 net earnings estimate of S$382.5m. While the local benchmark index has improved, lifting valuations from recent lows, trading activity remained relatively lackluster.

With improving valuations for SGX and its listed regional peers, we are raising our fair value estimate from S$7.06 (21x FY16 earnings) to S$7.40 (22x blended earnings). As the stock has already gained some 21% since our last report and with total return of less than 10%, we downgrade SGX to a HOLD.

Source: OCBC Research - 21 Apr 2016