• Maintain BUY with a new SGD8.20 Target Price from SGD8.40, 14% upside plus 4.4% FY19F yield, pegged to 22x FY20F EPS.
• For the first 4.5 months of FY19, SGX recorded SADV of SGD1.04bn – below our expectations. Consequently, we cut FY19F SADV by 13% to SGD1.11bn. We raise our derivatives volume forecasts, however, on recent strength.
• Overall, we lower FY19F-20F earnings by 3% and 2%. Our new Target Price is pegged to FY20F EPS from FY19F EPS.

We Cut FY19F (Jun) Securities Average Daily Value (SADV) Assumption Due to Recent Weakness

• For the first 1.5 months of 2QFY19, Singapore Exchange recorded SADV of SGD1.02bn, which is 5% lower vs 1QFY19’s numbers. Despite the coming 10 Dec reduction of the settlement cycle to two days from three – which could dampen trading – we remain optimistic that SADV can pick up from current levels in subsequent months. This is as institutional investors switch equities within their portfolios.
• SGX’s launch of the single stock daily leverage certificates in November is also a catalyst to grow revenue. However, the recent weakness led us to cut our FY19 SADV assumption 13% to SGD1.11bn.

China A50 Index Futures – Star Contributor

• For October, the China A50 Index Futures traded stood at 9.4m contracts vs 1QFY19’s monthly average of 7.84m. The derivatives trading momentum remains good, with the China A50 Index Futures accounting for 43% of total derivatives volume share.
• We raise our FY19F derivatives average daily contract 3% to 845,000 vs 1QFY19’s 861,000.

Higher Interim Dividend

• An interim dividend of SGD0.075 was paid on 5 Nov. This was higher than the SGD0.05 paid out in 1QFY18.
• SGX is on track to hit our target FY19 dividend of SGD0.31.

Strong Balance Sheet

• SGX remains in a net cash position, with a monopoly over the trading of Singapore-listed equities.

Limited Downside, Even If SADV Is Lower Than Our Base Case

• Our new Target Price of SGD8.20 is pegged to 22x FY20F P/E, which is the 4-year mean.
• Our base case FY20F SADV is SGD1.29bn. Even if the latter was 20% lower than our base case of SGD1.03bn, SGX’s fair value of SGD7.21 is close to the current traded price.
• Key risks: global economic fluctuations and geopolitical developments. Another area investors should monitor is the SGX-India Index Services & Products arbitration process.

Source: RHB Invest Research - 26 Nov 2018