Event
SGX is down 8% since the equity market selldown on 1st August and has corrected 32% from its 12-mth high achieved in October 2010 (just prior to announcement of ASX bid). We believe an attractive entry price has emerged for investors willing to take a long-term view on this progressive bourse. We also think the market has ignored SGX’s ability to pay out healthy dividends going forward. Upgrade to BUY.
Our View
Volatility is good for SGX. In the month of turbulent month of August, SDAV (securities daily average trading value) reached $2b, a post credit-crisis high. While this may be a one-off event, we do expect the introduction of high-frequency traders (REACH engine) will add more volatility to the market over time, which is something experienced in more mature markets.
With the various new products introduced, we believe revenue going forward will be increasingly less reliant on securities trading, which makes for more stable earnings. For example, derivatives revenue has held steady over the past 5 quarters even while securities
revenue fluctuated. Our sensitivity analysis estimates a conservative full-year EPS of 21.7 cents even if SDAV declines to $1.2b.
SGX has come to the end of a capex cycle and with a growing cash hoard, we believe it will be able to pay out 100% earnings for the foreseeable future, even though dividend policy is only for a minimum 80% payout. This will provide downside support for the stock. We note that even for the worst year during the credit crisis of FY09, dividend was $0.26/ share, which would translate to 3.8% yield at current price.
Action & Recommendation
Based on our estimates (SDAV assumption of $1.8b), SGX is currently trading at 22x FY12F earnings and 8.5x P/B, below their 5-year means. We peg our TP of $7.90 to 25x FY12F and upgrade SGX to a BUY from HOLD. While near-term earnings may be cyclical and reliant on market sentiments, we see SGX as a long-term structural growth story and believe the current market weaknesses provide a good buying opportunity.
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