• Maintain NEUTRAL with a higher SGD8.30 Target Price (from SGD8.10) pegged to 23x FY20F (Jun) P/E, 0% upside but with 4% FY20 (Jun) yield.
• Singapore Exchange (SGX:S68)’s 1QFY20 net profit grew 25% y-o-y to SGD114m, and accounted for 30% of our pre-results FY20F – ie above expectations. 1QFY20 SADV of SGD1.06bn was relatively unchanged from 1QFY19’s SGD1.07bn. However, 1QFY20 DADC was up 12% y-o-y, which drove earnings up.

1QFY20 Derivatives Was the Star, With Volume Growing 12% Y-o-y

• Singapore Exchange's 1QFY20 derivatives average daily contracts (DADC) traded was at 967,000, close to our FY20 estimate of 960,000. The star performer was iron ore derivatives (9% share), which doubled y-o-y. Equity derivatives volumes (78% share) rose by a marginal 6% y-o-y. Management said that derivatives clients who used to trade equity derivatives are also now trading currency and commodities, which contributed to the overall strength.
• See SGX Announcements.

We Believe Market Volatility Will Keep Derivatives Volume Firm

• We conservatively assume flat FY20F DADC on expectations of slower China A50 Index futures trading, with the Hong Kong Exchange’s expected launch of the MSCI China A Index futures.
• We raised our assumption of FY20 derivatives clearing fees per contract, which led to FY20F net profit being increased by 2%.

1QFY20 SADV Was Flat Y-o-y at SGD1.06bn

• Compared with 4QFY19, SADV was down 3% q-o-q. Our assumption of FY20F SADV of SGD1.08bn is close to the 1QFY20 SADV level.

Respectable Dividend Yield

• We forecast FY20 DPS of 31 SG cents, based on an 85% payout ratio – 1QFY20 dividend was at 7.5 SG cents.
• FY20F dividend yield is 3.8%, higher than the Singapore sovereign 10-year yield of 1.69%.
• See SGX Dividend History.

Strong Balance Sheet

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

Our TP of SGD8.30 Is Pegged to 23x FY20F EPS, Ie Its 4-year Mean

• Hypothetically, if FY20F SADV was 20% lower than our base case at SGD0.86bn, SGX’s fair value would be SGD7.43. Given SGX’s 15% YTD share price rise, we believe the positives (particularly for the derivatives business) are largely priced in – and maintain our NEUTRAL recommendation.
• Key risks are global economic fluctuations and geopolitical developments.

Source: RHB Invest Research - 25 Oct 2019