Singapore Exchange - Derivatives-led improvements (DBSVickers)

BUY S$7.35

Price Target : S$ 9.50

At a Glance

• 4Q11 earnings of S$79.5m, brought FY11 net profit to S$295m. Excl one-off ASX-SGX-related expenses, FY11 net profit was S$312m - in line.

• Weaker securities market dragged revenues y-o-y but was offset by improved derivatives revenues (despite weaker US$)

• Final DPS of 15 Scts declared (4 Scts was base DPS) led to FY11 DPS of 27 Scts or 90% payout of core earnings.

• Maintain Buy with S$9.50 TP.

Comment on Results

4Q11 earnings grew 3% q-o-q excluding the non-recurring ASXSGX related expenses. Overall revenues were weaker q-o-q from lower securities and derivatives volume and values. But, derivatives revenues were at a record high on a full year basis from higher volumes, thanks to new products coupled with higher market share for existing products, despite the weaker US$. The Nikkei225, CNX Nifty and FTSE China A50 posted record transaction volumes for the year. Other revenues from higher market data subscriptions rose hand-in-hand with increased connectivity and co-location services. Higher institutional settlements also added to other revenues. New memberships increased but we understand that benefits flowing into revenues normally lag by approximately a year. Expenses have started to taper off q-o-q as SGX reached the peak of its technology-related capex activity which will accrue benefits over time from its new derivatives platform, OTC clearing platform (allowing the clearing of interest rate swaps) and a data centre. SGX will launch its new securities trading platform on 15 Aug. Capex for FY11 was at S$57m, a steady increase since FY09, while depreciation costs also inched up over the three years. SGX is guiding for S$40-45m capex for FY12, largely relating to necessary replacements and replenishments while depreciation costs would range between S$42-43m. The all-day trading which began on 1 Aug contributed 6.5%/8% of total volumes on 1 Aug/2 Aug. IPO pipeline remains strong although the ultimate listing of these companies would depend on market conditions.

Recommendation

SGX is trading at 21x FY12 EPS, below its 5-year historical mean, vs. regional peers at 28x 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 to FY12 EPS of S$0.35.