• SINGAPORE EXCHANGE (SGX:S68)'s 1QFY20 net profit of S$114.2m (+25.4% y-o-y, +10.0% q-o-q) was a beat. Upgrade from Hold to ADD with a higher target price and 3-4% dividend yield.
• Derivatives volumes (iron ore, FX) power on; securities revenue held steady.
• We see Singapore Exchange as a potential beneficiary of flow transfers, rising corporate action activity in FY20-21F and better-than-expected cost management.

Another Record Quarter Marks a Strong Start to FY20F

• SINGAPORE EXCHANGE LIMITED (SGX:S68) reported 1QFY6/20 net profit of S$114.2m (+25.4% y-o-y, +10.0% q-o-q) which was ahead at 29%/28% of our/consensus full-year forecasts. See SGX Announcements.
• Topline rose 18.5% y-o-y to S$248m on a better performance across all three segments – FICC, equities and DCI; additional staff hiring (from 815 to 833 on average) and higher processing fees/royalties (in tandem with derivatives volumes) led to higher opex (+4.5% y-o-y).
• Interim DPS of 7.5 Scts unchanged y-o-y.

Thriving in a Volatile Environment

• Fixed income, currencies and commodities (FICC) business was the outperformer this quarter, surging 57% y-o-y to S$45.8m, thanks to increased volumes in iron ore derivatives contracts (+98%) and currency futures (+40% to 7m mainly in CNH/USD and USD/INR contracts).
• We expect demand for FX and iron ore hedging (underpinned by price volatility) to remain strong. Treasury income also grew on higher margin requirements and open interest. We think the current low interest rate environment and rise of green financing could attract more bond listings (1Q20: 270, 1Q19: 247).

Equities Revenue +14% Y-o-y From Cash and Derivatives

• Under the new revenue classification, equities (cash and derivatives) form the biggest segment at 71% of 1Q20 revenue (1Q19: 74%). Despite the lower average clearing fee of 2.68bp (1Q19: 2.88bp) due to higher participation of market makers/liquidity providers, cash equities revenue was 8% higher on more corporate actions, secondary equity fund-raising and changes in the mix of settlement activities.
• Equities (derivatives) also added S$14.7m in 1Q20, arising from higher margin balances and volumes across Nifty, Nikkei and MSCI Singapore (which mitigated the slowdown in China A50).
• Data, connectivity and indices (DCI) benefitted from higher derivatives connectivity subscriptions and continued growth of our colocation services business, resulting in 4% growth to S$25.7m.

Upgrade From Hold to ADD on Higher EPS and P/E Multiple

• We raise our FY20-22F EPS by 5.8-7.2% on higher derivatives volume and average contract fee, which prompts our rating upgrade from Hold to ADD and higher target price of S$9.00, now pegged to 22.4x FY21F P/E (10-year historical mean).
• SGX’s recent establishment of a S$1.5bn multicurrency debt issuance programme indicates possible M&As; we think any poor acquisition outcome, coupled with rising competition and market risk-off mode, could pose downside risks to our ADD call.
• Re-rating catalysts are higher-than-expected dividends, and earnings upside from cost tightening and stronger derivatives demand.

Source: CGS-CIMB Research - 25 Oct 2019