SGX - RHB Invest 2016-12-02: Strong SADV After US Presidential Elections To Persist

SINGAPORE EXCHANGE LIMITED S68.SI

SGX - Strong SADV After US Presidential Elections To Persist

Since the US Presidential Elections in early November, there has been a marked pick-up in SGX’s SADV.
November SADV of SGD1.3bn was 36% higher vs the average of SGD0.96bn from Jul-Oct. We expect the higher SADV to persist, as interest rate normalisation takes place.
The 5 Dec launch of the Shenzhen-Hong Kong Connect could catalyse more trading of China A50 Index Futures, which account for a high-teen percentage revenue share.

Maintain BUY with revised TP of SGD9.10 (from SGD9.04, 25% upside), pegged to FY18F P/E of 25x (1SD>1.5-year mean of 23.1x).

Securities average daily value (SADV), which had been lacklustre over the past few months, picked up sharply in November to SGD1.3bn vs the average SGD0.96bn during Jul-Oct. The sharp increase came about after the 8 Nov US Presidential Elections.
We have assumed FY17F SADV of SGD1.27bn, on expectations of more trading activities – as the Federal Reserve (Fed) raises rates, more funds would switch to equities from fixed income instruments.

For the derivatives business (~40% of SGX’s revenue), the 4MFY17 derivatives average daily contract (DADC) of 639,000 was lower than FY16’s 732,000. However, with the 5 Dec launch of the Shenzhen-HK Stock Connect, we expect stronger trading volumes for the China A50 Index Futures – where trading volumes account for ~ 40% of total derivatives trading volume. We are forecasting FY17 overall DADC to rise 7% YoY.

The acquisition was completed in early November. The despatch of consideration and payment of special dividend to Baltic Exchange shareholders should have been completed in late November.
Whilst the acquisition would add a small 1% of net profit to SGX, it reflects SGX’s aim in expanding into new markets to grow its derivatives business.

We peg our TP to a target FY18F P/E of 25x (1SD above the 1.5-year mean of 23.1x). This gives us a TP of SGD9.10, which is slightly higher than our previous SGD9.04 TP, as we roll over our target valuation to FY18.
At the same time, our DCF methodology leads to a fair value of SGD9.15, which supports our TP. Note that SGX’s dividend yield of 4.4% is attractive, compared with the sovereign 10-year bond yield of 2.3%.
We maintain our BUY recommendation on the stock.
The key risk to our call would be global economic trends.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-12-02

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.10 Up 9.040