• Singapore Exchange Limited (SGX)'s 4QFY18 core net profit of S$363.2m (+5.8% y-o-y) was in line. Maintain ADD.
• SGX seeks growth via new products (global freight) and enhanced capabilities, which will take time and come with higher opex and capex.
• Existing Nifty contracts are still allowed in the market as SGX resumes talks with India’s National Stock Exchange (NSE) on Gujarat International Finance Tech City (GIFT); we see this as near-term positive till further developments.
• We think investors will like SGX’s new dividend policy, which raises interim DPS to 7.5Scts per quarter (from 5Scts previously), implying a 4% yield.

4QFY18 in Line; Higher FY19F Opex Expected

SGX reported a FY6/18 core net profit of S$363.2m (+5.8% y-o-y), in line with our/ consensus expectations, thanks to record-high SDAV (S$1.26bn), fixed income listings and derivatives trading volume.

Overall turnover velocity was stable at 40% (FY17: 39%). 4QFY18 core net profit (S$83.7m) was -1.4% y-o-y due to higher staff costs (+S$13m), technology expenses (+S$3m) and professional fees (+S$3m). 

Management expects a higher opex (S$445-455m) in FY19F from client acquisition and overseas expansion.

Higher Volumes But Lower Average Fees for Securities, Derivatives

Both securities and derivatives achieved record SDAV (+12% y-o-y) and traded volume (+20% y-o-y to 198m contracts) respectively in FY18, even as average contract fee fell on the back of changes in product and customer mix. The lower contribution from post trade services was expected due to brokers’ migration, which should gradually pick up with the Phase 2 launch of the new post trade system.

Fortifying Its Positioning as a Dividend Paymaster

SGX declared a 4QFY18 final DPS of 15Scts, bringing full-year DPS higher to 30Scts and implying a 4% yield.

Having consistently recorded net profit and operating cashflow of more than S$320m and S$350m respectively over the past 5 years, SGX announced a dividend policy change and hiked its interim DPS to 7.5Scts (prev. 5Scts) from 1QFY19F onwards, payable on a quarterly basis. We believe this reflects management’s confidence in the company’s growth prospects and desire for dividend sustainability.

Source: CGS-CIMB Research - 27 Jul 2018