• 1Q slightly below consensus
• Derivatives was the star in 1Q
• Fair value of S$7.96

1Q19 Slightly Below Market Expectations

Singapore Exchange (SGX) posted 1QFY19 net earnings of S$91.1m, flat YoY and +8.8% QoQ, but slightly below market consensus of S$92.5m based on Bloomberg consensus. Equities and Fixed Income accounted for 41.4% of 1Q revenue, while Derivatives accounted for 46.8% of revenue (versus only 39.4% in 1QFY18). With record revenue, its Derivatives business is now the biggest contributor to revenue.

Derivatives Revenue rose 14.3% QoQ and 21.3% YoY to S$97.7m. Equities and Fixed Income, which used to be the main revenue contributor, saw revenue falling 14.9% QoQ and 13.3% YoY to S$86.4m. A 1Q dividend of 7.5 cents was declared. For the full year, management maintained its guidance of operating expenses of S$445m-$455m with the same technology-related expenses of S$60m-$65m.

Volatility Has Spiked; 2Q Could be Weaker

With the current on-going trade war and the expected spillover effect on slower economy growth, risk has intensified and market volatility has spiked. Together with the traditional quieter period heading into the Oct-Dec period, we expect SGX’s 2QFY19 performance to be affected due to a lack of corporate activities and lower trading activities. In this environment, we expect its equity revenue to remain under pressure, although its derivatives revenue could potentially benefit from heightened volatility.

Sharp Share Price Correction; Value Is Emerging

With management’s commitment to pay out full year dividend of 30 cents (or a quarterly dividend of 7.5 cents per quarter versus quarterly of 5 cents previously) and at the share price of S$6.93, dividend yield is 4.3%. In addition, the stock is currently trading at 1SD below its 10-year forward PER band. Based on the 10-year median of 22x and using FY19/20 earnings projections, the fair value estimate for the stock is S$7.96.

Source: OCBC Research - 22 Oct 2018