• Still a BUY with unchanged SGD8.10 Target Price, pegged to 23x FY20F (Jun) P/E, offering 12% upside plus 4% FY20F yield.
• SINGAPORE EXCHANGE LIMITED (SGX:S68)’s 3QFY19 net profit was down 1% y-o-y, but in line with expectations – 9MFY19 net profit accounted for 79% of our pre-results FY19F.
• Strength in China A50 Index futures trading offset the weakness from soft SADV.

SGX's 3QFY19 Securities Average Daily Value (SADV) Declined 30% Y-o-y

• 3QFY19 securities average daily value (SADV) declined 30% y-o-y to SGD1.02bn. We forecast FY19 SADV of SGD1.04bn, slightly above 9MFY19’s SGD1.02bn – MTD Apr 2019 SADV was SGD1.01bn.
• Our FY20F SADV assumption is a higher SGD1.12bn, as we expect global stabilisation to drive FY20F SADV higher y-o-y.

3QFY19 Derivatives Volume Rose 12% Y-o-y

• The key driver is the China A50 Index Futures, whose 3QFY19 contracts traded rose 32% y-o-y – A50 Index Futures accounted for 46% of total derivatives volumes. We believe market volatility will keep derivatives volume firm, though we have conservatively assumed FY19F derivatives average daily contracts (DADC) of 924,000 vs 9MFY19’s 928,000, which is higher than FY18’s 795,000.
• We have conservatively assumed lower y-o-y FY20F DADC on expectations of slower China A50 Index Futures trading, with HKEx’s expected launch of the MSCI China A Index Futures.

SGX and NSE Have Prepared a Joint Proposal

• SGX and National Stock Exchange of India (NSE) have prepared a joint proposal to serve a larger market. The proposal has been submitted to regulators on both sides. SGX management said developments are good but it will not speculate on when the approvals are likely. We will await more details from SGX before examining the impact on future earnings.

We Marginally Raised Our FY19F Net Profit by 3%

• 3QFY19 ROE was a strong 37%, and we forecast FY19 ROE of 37%.

Respectable dividend yield.

• SGX is on track to hit our target SGD0.32 DPS for FY19F, which translates to a yield of 4.3% – this is higher than the Singapore sovereign 10-year yield of 2.16%.

Strong balance sheet.

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

Limited downside even if SADV is lower than our base case.

• Our Target Price of SGD8.10 is pegged to 23x FY20F EPS, ie the 4-year mean.
• Hypothetically, if FY20F SADV was 20% lower than our base case at SGD0.90bn, SGX’s fair value would be SGD7.19, close to the current traded price.
• Key risks are global economic fluctuations and geopolitical developments.

Source: RHB Invest Research - 26 Apr 2019