• Singapore Exchange's 1Q19 net profit was stable at S$91m, deemed in line with our/consensus full-year numbers. Derivatives revenue was at a record- high S$98m.
• Management expects derivatives’ growth momentum (+21% y-o-y) to sustain in such market volatility, hence mitigating the securities’ market weakness.
• Maintain ADD; the stock offers 10% upside and 4% dividend yield. It currently trades at 20.2x forward P/E (- 1 s.d. below historical mean).

1Q19 net profit of S$91m (+0.4% y-o-y) was broadly in line

• SGX’s 1QFY6/19 net profit held steady y-o-y at S$91.1m, thanks to record-high derivatives revenue (+21% y-o-y to S$97.7m), which offset the lacklustre equities and fixed income performance (-13% y-o-y to S$86.4m). This formed 26%/24% of our/consensus full-year forecasts.
• 1Q19 interim DPS of 7.5 Scts was expected.
• Few updates for both Nifty and stock connect with Bursa were shared during the briefing.

Improved volumes and open interest for derivatives

• A combination of US$ appreciation, steepening yield curve, increased hedging and flight to quality assets, that arose from market volatility and emerging market weakness, underpinned the 17% spike in derivatives volume to 54.2m contracts, especially for China A50 and the expanded MSCI Net Total Return index futures suite.
• While average fee per contract fell to S$1.05 (1Q18: S$1.12) due to product mix changes, we saw higher open interest that led to stronger collateral management income.

Securities suffered from lower SDAV and post-trade services

• SDAV (S$1.07bn) was 8% lower in 1Q19, and issuer services revenue decreased 12% y-o-y, but pipeline of IPO mandates (including those for dual-class shares) remains intact, according to management.
• Post trade services revenue declined 24% due to downward re-pricing of delivery-vs-payment guarantee fee w.e.f. Apr 18, as well as the completion of broker migration in Feb 18.

Negative jaw in 1Q19

• SGX recorded a 4% increase in opex to S$102.5m, on the back of higher headcount (815 vs. 1Q18’s 790) and professional fees, which still falls below management full-year guidance of S$445m-455m.
• FY19F capex guidance of S$60m-65m is intact.

Maintain ADD, but with a lower Target Price of S$7.60

• We raise our FY19-21F EPS by 2.9% to reflect better derivative volume and slightly lower operating expenses.
• Our ADD rating is unchanged but with a lower Target Price of S$7.60, pegged to 22.1x FY20F P/E which is 0.5 s.d. below historical mean (prev 24x).
• Downside risks could stem from increasing regional competition and further equity market weakness.
• Positive Nifty outcome and stronger derivatives volume are potential catalysts.