• Derivatives fell in 3Q
• Maintaining guidance
• Yield is 3.76%

3Q Was Below Consensus

Singapore Exchange (SGX) posted a 6.8% YoY drop in 3QFY17 net earnings to S$83.06m, bringing 9-month profits to S$254.46m, down 6.5%. Excluding the one-off loss of S$4.0m from the disposal of its investment in Bombay Stock Exchange, net profit would have been S$87.0m, down 2% YoY, but this is still below Bloomberg consensus estimate of S$90.3m. Total revenue fell 1.5% to S$202.7m. Equities and Fixed Income revenue rose a modest 1.1% to S$103.1m (51% of total group revenue), while Market Data and Connectivity revenue rose 13% to S$24.4m (or 12% of group revenue).

The equity rally in 1Q 2017 helped to mitigate the decline in revenue from its Derivatives segment, which fell 8.6% YoY to S$75.2m or 37% of total revenue. This was mainly attributed to lower volume, especially of the A50 contracts, which fell 30% YoY. A 5 cents dividend was declared for the quarter and payable on 8 May 2017.

Projecting Flat 4Q

While global equity markets have done relatively well this year, buoyed by optimism of US fiscal stimulus and tax reform plans, which could result in better corporate earnings, on the local front, we expect volatility and uncertainty to remain as corporate earnings outlook is still fairly muted for this year.

Overall, we expect 4QFY17 to be fairly flat versus 3QFY17 (before one-off), resulting in FY17 net earnings of S$342.6m. Management is maintaining its guidance for FY17, that is, operating expenses of S$405m-S$415m with technology-related capital expenses at S$65mS$70m, and indicated that these expenses could possibly come in at the lower end of the range.

Slight Cut in FV From S$7.64 to S$7.53

Despite the gains for the STI since the start of the year, this was not reflected in SGX’s 3Q performance largely due to the drag from its derivatives business. We have cut our FY17 estimates to reflect this, but believe that a 28 cents full year dividend payout is still likely.

Based on yesterday’s closing price, yield is still decent at 3.76%. We have also marginally lowered our fair value estimate from S$7.64 to S$7.53. We are maintaining our HOLD rating but will accumulate at S$7.10 or lower.

Source: OCBC Research - 21 Apr 2017