• Post-election optimism
• Improved market sentiment
• Hold; accumulate at S$7.20 or lower

Better 2Q results post US election

Singapore Exchange (SGX) posted 2QFY17 results which were ahead of market expectations. Net earnings came in at S$88.3m versus Bloomberg consensus of S$84.4m, up 5.4% YoY and 6.3% QoQ. The increased market activities post the US election boosted its revenue. Equities and Fixed Income Revenue grew 6.3% YoY or 3.5% QoQ to S$101.4m, accounting for 51% of total group revenue. Derivatives fell 3.4% YoY to S$75m (38% of group revenue) due to a change in the mix of derivatives contracts. A 5 cents dividend was declared for the quarter and payable on 6 Feb 2017.

Improved outlook; cost discipline remains

Management appears to be fairly optimistic about the outlook as they shared that the IPO pipeline looks healthy for 2017. The positive trading momentum from last quarter appears to have continued into this quarter as optimism returns to the market. While investor sentiment has improved, uncertainties over US policies and the impact on the region remain unclear and we expect volatility to remain in the market. Against this backdrop, management is also cognizant of the need for cost discipline.

Meanwhile, the group also announced the divestment of BSE Ltd (estimated value of S$42.8-42.9m) as it re-looks its business strategy in India and it expects loss of S$2m from this disposal. Management has also lowered its guidance for FY17 operating expenses from S$420m-S$430m to S$405m-S$415m with technology-related capital expenses at S$65mS$70m (same as previous guidance).

Raised FV to S$7.64; HOLD

With the better outlook for the trading market and with expected volatility ahead, this could potentially be positive for trading activities on the exchange. As such, we are using 22x earnings as our valuation parameter due to improved valuations for its listed peers versus 21x previously, and this raises our fair value estimate from S$7.36 to S$7.64. Dividend yield remains decent at about 3.7% at current price level. We are maintaining our HOLD rating, but will accumulate at S$7.20 or lower.

Source: OCBC Research - 20 Jan 2017