SGX: Weak Sep ADT could linger on (DMG)

(NEUTRAL, S$6.74, TP S$6.90)

We are cutting our ADT assumptions, and downgrading recommendation. 1QFY12 securities market average daily turnover (ADT) was weaker than expectations. For the period of Jul-Sep 2011, securities market ADT of S$1.60b was up from Apr-Jun 2011’s S$1.45b. However, it is below our expectations. Factoring in the global market uncertainties (which led to Sep 2011’s ADT of a lower S$1.37b), we are lowering our FY12 ADT assumption to S$1.66b, from S$1.90b previously. Our FY13 ADT assumption is also cut to S$1.78b, from S$2.02b previously. Following this, we cut our FY12F & FY13F net profit by 12% and 11% respectively. Our target price for SGX, which is pegged to FY13 EPS, is therefore cut by 22% to S$6.90.

Downgrade to NEUTRAL.

Futures trading volume surged in Aug 2011, but strength not expected to sustain. Aug 2011 futures trading volume was 7.84m, up 49% YoY, on the back of volatile global markets. This pushed up Jul-Aug 2011 futures volume to a monthly average of 6.4m, ahead of Apr-Jun 2011’s monthly average of 5.19m. Whilst this is positive, we do not expect the Aug strength in futures trading volume to persist.

Target P/E rating has been lowered. SGX’s P/E is also unattractive when compared against peers. Based on consensus expectations, SGX’s P/E is higher than the average of peers such as Bursa Msia and ASX. Although SGX’s P/E is lower than HKEx, we feel this is justified given the stronger growth potential for HKEx. Whilst SGX traded at a 10-year historical average P/E of 23x, the P/E was low during periods of global uncertainty. In FY09 (the midst of the global financial crisis), SGX traded at an average P/E of only 16.5x. Instead of valuing SGX at 22x FY13 EPS, we now set SGX target price at 19x FY13 EPS, which yields our new target price of S$6.90.