SGX's  2QFY15  (Jun)  results  met  our  and  consensus  expectations.Maintain  NEUTRAL  with  a  revised  TP  of  SGD7.65  (3.2%  downside).2QFY15 securities market ADV improved 4% YoY/8% QoQ but it was thederivatives market that had a standout quarter. Daily average derivativecontracts surged 50% YoY/41% QoQ to 634,000, as the liberalisation of the Shanghai stock market helped lift interest in the China A50 futures. 

2QFY15  results  improved,  with  net  profit  of  SGD87m  (+16%  YoY,+12% QoQ) bringing 1HFY15 net profit to SGD164m (-2% YoY), or 48%of our and consensus full-year net profit estimates.  

Stellar  performance  from  derivatives.  Average  daily  value  (ADV)  forsecurities market  improed  8%  QoQ  and 4% YoY  to SGD1.04bn,  whileturnover velocity  was higher at 36% vs 32% in 1QFY15  (2QFY14: 35%).The derivatives  market, however,  was the star performer for the quarterwith  2QFY15  derivatives  volume  rising  to  40m  contracts  vs  28.8m  in1QFY15  and  26.3m  in  2QFY14.  The  rise  was  mainly  driven  by  higherChina A50 Index futures and iron ore product volumes. Overall, 2QFY15 revenue  climbed  19%  YoY  and  16%  QoQ  on  the  back  of  strongercontribution  from  derivatives  market  (+46%  YoY,  +42%  QoQ).  Whileoperating  leverage  for  exchanges  tends  to  be  high,  SGX's  2QFY15operating profit growth was  only in line with topline growth due to higherstaff costs (higher headcount and salary adjustments) as well as higherprocessing  and  royalties  (due  to  a  rise  in  derivatives  volumes).Management revised the opex guidance for FY15 to SGD360-370m from SGD330m-340m.  

Dividend.  As  expected,  SGX  declared  an  interim  DPS  of  4  cents(2QFY14:  4  cents).  We  are  forecasting  FY15  total  DPS  of  28  cents(FY14: 28 cents), based on a net payout ratio of 90% (FY14: 93%). 

Forecasts.  We  tweak  our FY15-16  net profit forecasts  higher  by  2-3%mainly  due  to  an  upward  revision  in  our  FY15/FY16  average  dailyderivative  volume  assumptions  to  600,000/660,000  from 460,000/504,000 respectively. 

Valuation  and  recommendation.  Our  TP  is  revised  up  to  SGD7.65 from SGD7.40, based on an unchanged target 2015 P/E of 22.5x (a 10% discount  to  the  stock's  5-year  average  P/E  to  reflect  the  volatile securities market conditions). Maintain NEUTRAL.

Briefing Highlights
Accelerating investments in derivatives and fixed income businesses.  SGX is accelerating  its  investments  in  the  derivatives  and  fixed  income  businesses  as management  sees  good  potential  and  opportunities  ahead.  While  SGX  did  not provide  any  quantitative  benefits  from  the  accelerated  investments,  qualitative benefits  include  a  shorter  time  to  market  for  new  products.  As  such,  technologyrelated capex  is now expected  to be  around  SGD70m-75m p.a. from SGD50m-55m previously.  Meanwhile,  FY15  opex  guidance  was  raised  to  SGD360m-370m  from SGD330m-340m, of which SGD16m relates to the consolidation of EMC and the rest relates to volume-related variable expenses.

Market-disruption costs not too significant. SGX said that expenses related to the technology-related service disruptions would not be too significant, at about SGD3 m-4m, which will be recognised as and when incurred. Update on securities market transformation. With respect to the recent reduction in board lot size to 100 units from 1,000 units,  SGX has seen retail activity in higherpriced stocks increase. While it is still early days, SGX appeared optimistic  that  the improved retail participation can be sustained.

Forecasts
We  lower  our  FY15/FY16  ADV  assumptions  to  SGD1.1bn/SGD1.2bn  from SGD1.2bn/SGD1.3bn respectively, but this is more than compensated by an upward revision  in  our  FY15/FY16  average  daily  derivative  volume  assumptions  to 600,000/660,000  from  460,000/504,000.  Overall,  we  raise  our  FY15-16  net  profit forecasts by 2-3%.

Valuations and recommendation
The earnings revisions above have lifted our TP for SGX to SGD7.65 from SGD7.40, based on  an  unchanged 2015  target P/E of 22.5x (a  10% discount to the stock's 5-year  average  P/E  to  reflect  the  volatile  securities  market conditions).  We  make no change,  however, to our  NEUTRAL  recommendation. While we are encouraged by the strong performance of the derivatives markets as well as various initiatives SGX is  taking  to  transform  the  securities  market,  it  appears  that  the  impact  on  thebottomline would only start to be reflected further down the road.

Source: OSK-DMG