Singapore Exchange (KimEng)

Event

Singapore Exchange (SGX) announced its FY Jun11 results which were in line with our expectation. While we like management’s proactiveness, we maintain our HOLD call on the stock as we see limited upside at the current level. That said, we view $7.00 as an attractive entry point should there be a market correction.

Our View

FY Jun11 revenue was up 3% while underlying net profit was steady at $311.8m. Dividend payout for the quarter is 15 cents, bringing full-year dividend unchanged at 27 cents (98% payout). Compared to FY Jun10, securities daily average value (SDAV) was higher at $1.6b versus $1.5b. Encouragingly, derivatives, which accounted for 21% of group revenue, were up 11% on increased product offering and more trading.

Despite the slowdown in Chinese listings, SGX remains a relatively attractive venue for IPO and was ranked sixth globally in the first half of this year, from 16th in 2010. In bond listing, which is another area management is pursuing, SGX was top in Asia, with 81% of Asia ex-Japan market.

We understand management’s intention to broaden its revenue and market mix in order to rely less on Singapore and securities trading (currently 44% of revenue). For example, international products accounted for 56% of revenue versus 51% in FY Jun10. This is also part of a long-term effort to increase the structural trading volumes and revenue.

With a cash pile of $549m, heavy capex plans coming to an end and no M&A target in sight, we believe SGX has no problem paying out 100% of earnings for the foreseeable future. Even during the quietest quarter of the credit crisis from 3QFY Jun09 (January-March 2009), SDAV was about $0.9b and EPS was 5.2 cents. We therefore have reason to believe that with a broader product mix now, EPS/full-year dividend would be at least 21 cents even if the market nosedives. This makes $7 a very attractive entry price for the stock (3% yield).

Action & Recommendation

We assume an FY Jun12 and FY Jun13 SDAV of $1.8b and $2b, respectively. We peg our target price of $7.90 at 25x FY Jun12F (historical PER mid-peak cycle). Maintain HOLD.