• Singapore Exchange (SGX:S68)’s 3QFY20 (Jun) net profit surged 38% y-o-y to SGD137m, as securities average daily value (SADV) rose 58% y-o-y to SGD1.61bn.
• Singapore Exchange is unattractive, as the SADV appears peakish after March’s surge.
• Stay NEUTRAL and a higher SGD9.70 Target Price from SGD9.10, 5% downside, pegged to 24x FY21F P/E.

SGX's 3QFY20 Equity Derivatives Volume Rose 24% Y-o-y

• Singapore Exchange's 3QFY20 equity derivatives volume rose 24% y-o-y to 61.5m contracts, largely due to an 85% jump for the Japan Nikkei 225 Index futures – a 15% share of total equity derivatives volume – while the China A50 Index futures recorded a mild 5% y-o-y rise, with volume share falling to 47%. 3QFY20 equity derivatives revenue rose 24% y-o-y, accounting for a 36% share of overall revenue.
• We believe market volatility will keep volumes firm.

We Raise Our FY20 SADV Assumption by 9%

• Singapore Exchange's 3QFY20 SADV stood at SGD1.61bn, up from 3QFY19’s SGD1.02bn. This contributed to cash equities revenue rising 38% y-o-y to SGD111m, accounting for a 38% share of overall revenue.
• We raise our FY20 SADV assumption to SGD1.35bn from SGD1.24bn. This largely explains our increasing of FY20F net profit by 4% to SGD457m. However, we have assumed a lower SGD1.15bn SADV for FY21 on reduced trading, as COVID-19 stabilises.
• 3QFY20 fixed income, currencies & commodities revenue rose 23% y-o-y – a 15% revenue share. Currencies & commodities derivatives revenue rose 23% y-o-y and has a 14% topline share.

Respectable Dividend Yield

• We forecast a FY20 DPS of 36 cents/share – giving a 4% dividend yield – based on an 85% payout ratio. 3QFY20 dividend stood at 7.5 cents. At the virtual results briefing, management said it aims to increase dividends’ absolute level while providing for capex to scale up its multi-asset platform. Singapore Exchange' will also continue with quarterly dividend payments, despite moving to half-yearly results reporting.
• Our SGD9.70 Target Price is pegged to 24x FY21F EPS, ie 1SD above the 4-year mean of 22.5x. Given the 23% SGX Share Price rise over the past six months, its valuation is not cheap.
• On the other hand, Singapore Exchange remains in a net cash position – with a monopoly over the trading of Singapore-listed equities – and downside is seen as limited. Hence, we maintain our call.

Global Economic Fluctuations and Geopolitical Developments Are Key Risks

• Downside risk: If the COVID-19 pandemic is prolonged, trading volumes could experience a gradual decline from current high levels.
• Upside risk: If the pandemic is resolved soon, we could see another round ding volume surges.

Source: RHB Invest Research - 24 Apr 2020