Event:
Since downgrading our recommendation on Singapore Exchange (SGX) to HOLD in April, the stock has drifted down by 9%, reflecting the lacklustre market activity during the period. At its current valuation, we continue to see downside risks in terms of near-term earnings profile outweighing positive initiatives which may develop in the longer term. Maintain HOLD.
Our View:
With FY Jun11 coming to a close, we expect SGX to register a full-year net profit of $305m ($287m pre-adjustments for exceptional items). This takes into account an average daily trading value of $1.6m in 4QFY Jun11, which is lower QoQ and YoY. We expect the 85-90% dividend payout policy to remain intact and this will work out to a final dividend of $0.11 per share.
Management has been proactive in seeking to increase product offerings and improve the trading environment. One area of note is in regulation, where SGX has recently proposed rule changes on annual general meetings to increase shareholder engagement and enhance corporate governance practice. It also announced several new appointments in its efforts to beef up its regulatory team.
The trading of Singapore government bonds (SGS bonds) will start on SGX from 8 July this year, making it easier for individual investors to trade. Other recent initiatives include the clearing of Asian Foreign Exchange Forwards by September this year and progress on the ASEAN Exchanges Collaboration to achieve inter-connectivity among the markets. We believe these are all positive steps that will bear fruit, but in an incremental way over a longer time period.
Action & Recommendation:
In the meantime, securities trading will continue to account directly for 45% of group revenue. We assume FY Jun12 and FY Jun13 ADT of $1.8b and $2b, respectively, which are mid-peak levels of the last cycle. We peg our target price of $7.55 at 25x FY Jun12F (historical PER cycle). At this juncture, we see downside risks to our assumptions. Maintain HOLD.
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