• Decline in Derivatives continued
• Prudent cost management
• Current yield is 3.7%

Earnings Were Slightly Below Expectations

Singapore Exchange (SGX) posted 4QFY17 net earnings of S$85.2m, +10.9% YoY and +2.6% QoQ. This led to full year earnings of S$339.7m, slightly below Bloomberg consensus estimate of S$347.3m. Excluding one-off items, net profits would have been S$347.4m. Its Equity and Fixed Income (EFI) revenue, which accounted for about 51% of total revenue in FY17, was flat for the year although listing revenue was boosted by a record number of bond listings (raising some S$384.7b).

Derivatives revenue fell 6.8% to S$303m in FY17, largely due to a drop in volume as the number of contracts declined 10%. Market Data and Connectivity bucked the downtrend and posted a 7% rise in revenue for the year. A final dividend of 13 cents was declared, making full year payout of 28 cents (same as last year). This will be payable on 6 Oct 2017.

Guiding for Expenses of S$425m-S$435m

Management is guiding for FY18 operating expenses of S$425m to S$435m (actual FY17 expenses of S$399m, which was below management’s guidance for the year), and technology-related capital expenditure of between S$60m-S$65m (slightly below FY17’s guidance). Contract processing revenue fell 27% to S$11.6m in FY17 largely due to a drop in the number of contracts processed. Going forward, this amount will continue to dip as brokers migrate to their own back office systems.

Increasing FV From S$7.53 to S$7.83

Despite uncertainty in the market, Asian equities have done well so far this year and valuations have edged higher. We roll our valuation into the new financial year and based on peers’ average forward PER of 23x, we raise our fair value estimate from S$7.53 to S$7.83. At current price, the dividend yield is 3.7%. Maintain HOLD.

Source: OCBC Research - 28 Jul 2017