• 4Q hurt by impairment
• Watching cost
• Lack of price drivers for now

Impairment of S$6m dragged down earnings

Singapore Exchange (SGX) posted a 20% YoY and 14% QoQ decline in 4QFY16 net profit to S$76.8m; this was below Bloomberg consensus and our expectations. This was largely due to an impairment charge of S$6m for its investment in Bombay Stock Exchange. Excluding this, net earnings would have been in line with expectations.

Total revenue fell 8% YoY and 4% QoQ to S$198.1m. Equities and Fixed Income fell 7% YoY to S$101.3m, while Derivatives fell 13% YoY to S$74.5m.

For the full year, net profits came in flat at S$349m on revenue of S$818m. Listing revenue fell 10% due to a decline in number of bond listings and fewer new equity listings (21 versus 34 the previous year).

Securities Trading and Clearing Revenue fell 2% and accounted for 25% of total revenue. Derivatives grew 10% YoY to S$325m and accounted for 40% of total revenue. Final dividend of 13 cents was declared, giving full year payout of 28 cents (same as last year).

Cost containment seems key

Over the past three years, expenses have grown faster than revenue, resulting in declining operating margin from 58% in FY13 to 52% in FY15 and an even lower level of 50% in FY16. Management is guiding for FY17 operating expenses of S$420m-S$430m (up from the guided range of S$415m-S$425m in FY16) and with technology-related capital expenses at S$65m-S$70m (versus the previous year of S$70m-S$75m).

The global environment remains challenging for equities and this could mean limited upside for revenue expansion. Against this backdrop, management shared that they will be “disciplined in expenditure” and focus on expansion and additional staffs in areas that they are developing.

Cutting FY17 earnings on weaker outlook

The soft market outlook and cautious trading environment are key reasons for the cut in our FY17 earnings estimate. We are dropping our FY17 earnings from S$382m to S$361m. Rolling our estimate forward and using 21x earnings (peers’ average), we dropped our fair value estimate from S$7.40 to S$7.36. With relatively lackluster trading activity and less than 10% total upside, we maintain our HOLD rating.

Source: OCBC Research - 28 Jul 2016