• Maintain NEUTRAL with higher target price pegged to 23x FY21F (Jun) P/E, 1% downside – we raise our Target Price as we roll over valuation one year forward.
• While 2QFY20 securities average daily value (SADV) was up a respectable 9% y-o-y, derivatives trading for Oct-Nov 2019 was down 15% y-o-y. Singapore Exchange (SGX:S68)’s earnings strength for 1QFY20 was mainly driven by derivatives trading for commodities and currencies – and derivatives may disappoint when results are released on 23 Jan 2020.

Oct-Nov 2019 Derivatives Volume Dropped 15% Y-o-y

• For Oct-Nov 2019, derivatives average daily contracts (DADC) traded was 857,000. 5MFY20 (Jun) DADC of 926,000 is closer to our FY20F of 960,000. The China A50 Index futures traded accounted for 36% of volume traded in Oct-Nov 2019.
• We believe market volatility will keep derivatives volume firm. We have conservatively assumed y-o-y flat FY20F DADC given recent slower China A50 Index futures trading, offset by stronger 1QFY20 commodities and currency derivatives.

2QFY20 SADV Up 9% Y-o-y to SGD1.04bn

• Compared with 1QFY20, SADV was flat q-o-q. Our assumption of FY20F SADV of SGD1.08bn is close to 1HFY20’s SGD1.04bn.

Respectable Dividend Yield

• Singapore Exchange declared FY19 DPS of 30 SG cents, representing a payout ratio of 82%. This is lower than FY18’s 88%.
• We forecast FY20 DPS of 31 SG cents, based on an 85% payout ratio – this translates to a FY20F dividend yield of 3.5%, which is higher than the Singapore sovereign 10-year yield of 1.71%.

Strong Balance Sheet

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

Our Target Price Is Pegged to 23x FY21F EPS, Ie Its 4-year Mean

• Hypothetically, if FY21F SADV was 20% lower than our base case at SGD0.92bn, Singapore Exchange’s fair value would be SGD7.87. Given Singapore Exchange’s 25% share price rise through 2019, we believe the positives (particularly for the derivatives business) are largely priced in – maintain our NEUTRAL recommendation.
• Key risks are global economic fluctuations and geopolitical developments.

Source: RHB Invest Research - 2 Jan 2020