• Record 1QFY20 net profit of S$114m (+25% y-o-y, +10% q-o-q).
• Establishment of S$1.5bn debt program offers flexibility for investment opportunities.
• Stock offers 3.6% yield which remains attractive amid a lower yielding market environment. See SGX Dividend History.
• Maintain BUY with higher target price of S$8.90.

Pursuing Growth and Scale as a Multi-asset Exchange

• We believe Singapore Exchange (SGX:S68) will continue to benefit from strong demand for risk management instruments amid an uncertain market environment. It has delivered record derivatives performances in the last few quarters, offsetting the slower equities business.
• Hence, we maintain our BUY call on Singapore Exchange with a higher Target Price of S$8.90, factoring higher ROE assumptions. Going forward, Singapore Exchange targets to double revenue from Data, Connectivity and Indices (DCI), as well as Fixed Income, Currencies, Commodities (FICC) segments in the next five years as Singapore Exchange looks at various investment opportunities and bolt-on acquisitions to fuel growth.
• We believe SGX Share Price should continue to be well-supported by its absolute dividend of 30 Scts/year, implying 3.6% yield at current level, amid a lower yielding market environment. See SGX Dividend History.

Record 1QFY20 Net Profit

• Singapore Exchange’s reported quarterly net profit of S$114m (+25.4% y-o-y, +10.0% q-o-q) was a record after more than 10 years. There was strong revenue growth across all segments (Fixed Income, Currencies and Commodities [FICC], Equities and Data, Connectivity and Indices [DCI]), and revenue growth (S$248m, +18.5% y-o-y, -0.2% q-o-q) outpaced expenses growth (+10.1% y-o-y, -9.9% q-o-q). The higher expenses were mainly due to higher variable staff costs and royalties.

Strong derivatives volumes and collateral income powers on.

• Apart from strong treasury income on higher interest rates and margin balances, derivatives continued to post a strong performance with 6% y-o-y higher trading volumes in key equity index contracts, 40% growth in FX futures volumes, and 98% growth in Iron Ore derivatives volumes.
• Overall, currencies and commodities contracts improved 55% y-o-y. Average fee per derivative contract increased by 10% y-o-y to S$1.15, largely on the back of increased China A50 Index futures contracts and iron ore contracts.
• On the other hand, Securities Daily Average Value (SDAV) at S$1.06bn was largely flat y-o-y and q-o-q.

Other Developments

Re-classification of revenues took effect this quarter.

• In June 2019, Singapore Exchange has announced the realignment of business and client organisation. The re-classification of revenues took effect in 1QFY20, with cash equities and equity derivatives business combining to form the largest unit, Equities, which accounted for 71% of total revenue.
• Aside from this, adoption of SFRS(I) 16 leases saw a S$3m y-o-y decline in technology and premises expenses respectively and S$6m y-o-y increase in depreciation.

Formation of S$1.5bn multicurrency debt program; reaffirms dividend policy.

• Even as Singapore Exchange is currently in a net cash position, Singapore Exchange has recently established a S$1.5bn multicurrency debt program, which provides flexibility for investment opportunities.
• Singapore Exchange has previously shared that it would seek to grow FICC and DCI at a faster pace as it continues to build scale. Management has reaffirmed that they seek to pay sustainable and growing dividends, having revised their dividend policy a year ago to that of a fixed dividend policy of S$0.075/quarter. See SGX Dividend History.

Working on a multi-asset strategy.

• The management disclosed that they are seeing more clients trade a wider range of products across various asset classes (i.e. 25% of clients trade in more products than just equities). Singapore Exchange’s increasing efforts to grow its international presence also saw an increased participation of more than 50% in overnight sessions, particularly in Japan and China products.
• Share of total derivatives volumes traded overnight grew from 10% a year ago to 18%. We believe broader efforts by Singapore Exchange to arrest the slower cash equities businesses have begun to bear fruit.

Valuation & Recommendation

• We maintain BUY on Singapore Exchange with a revised Target Price of S$8.90 as we believe Singapore Exchange will continue to benefit from strong demand for risk management instruments amid the uncertain market environment.
• We derive our revised Target Price of S$8.90 based on the dividend discount model (k=7%, g=4%, ROE=37%) as we revise our ROE assumptions from 35% to 37%.
• We believe ROE enhancement will be achieved on the back of Singapore Exchange’s organisation restructuring. Our Target Price implies 21x FY20F PE, and Singapore Exchange’s current PE valuation at below its 5-year historical mean is undemanding. We have not factored in any inorganic opportunities into our assumptions.

Where We Differ

• Singapore Exchange’s volume growth in derivatives in the last few years is testament to its execution capabilities. We believe that SGX has the prerequisites to power growth in the identified segments of FICC and DCI.

Source: DBS Research - 25 Oct 2019