Singapore Exchange (DBSVickers)

BUY S$7.41 STI : 3,079.74

Price Target : 12-Month S$ 9.50 (Prev S$ 10.50)

Reason for Report : Cut in earnings and TP

Potential Catalyst: Improving trading volume, better derivatives revenue, realisation of initiatives from strategies to enhance velocity

Softer trends

• Lacklustre trading volumes and values dampen nearterm earnings; FY11-13F trimmed 15-17%

• Remains a key location for international listings

• Valuations below 5-year historical mean. Maintain Buy but TP lowered to S$9.50

Soft trading volumes and values. Trading volumes and values in the securities market have softened. Average daily trading volume and value stands at 1.56bn and S$1.62bn respectively. Derivatives revenues are likely to be soft. Although derivatives trading volumes have remained relatively robust, the weak US$ (to S$) is expected to cap upside. We have subsequently lowered our average daily volume and value assumption by 5% across FYJun11-13. Coupled with soft derivatives and other revenues, we trimmed earnings by 15-17% over the same period. Apr-Jun-11 (4QFYJun11) average trading volumes and values dipped to 1.21bn and S$1.43bn vs 1.58bn and S$1.71bn in 3QFYJun11 respectively. SGX is due to release its 4QFYJun11/FYJun11 results early August. We estimate a final DPS of 15 S cts (of which 4S cts is a base DPS) would be declared bringing full year DPS to 27S cts (90% payout).

SGX remains a key location for international listings. As part of its Asian Gateway Strategy, SGX will continue on its aggressive expansion of OTC financials (derivatives), including more stocks in its ADR platform, revenue expansion with its colocation services and expansion in its retail bonds platform. SGX’s securities market will trade continuously from 1 Aug 2011 enabling market hours to overlap more with other Asian exchanges. All these initiatives should help to ensure that SGX remains an attractive location within Asia as an international hub for one-stop service for both equities and derivatives as well as help to support sustainable revenue flow and avenues to enhance turnover velocity for SGX in the medium term.

Maintain Buy with TP lowered to S$9.50. SGX is trading at 21x FY11 and only 18x FY12 EPS, below its 5-year historical mean, vs. regional peers at 27x FY11 and 23x FY12 EPS. Our TP is based on the Dividend Discount Model assuming 90% dividend payout, 8% growth and cost of equity of 11.6%, which implies 27x target PE. We have rolled over our valuation base to FY12 EPS of S$0.35.