Singapore Exchange - Bearing the brunt (DBSVickers)

FULLY VALUED S$6.40 STI : 2,621.40

(Downgrade from Buy)

Price Target : 12-Month S$ 5.40 (Prev S$ 9.50)

Reason for Report :Earnings and TP downgrade

Potential Catalyst: Recovery of trading volumes

DBSV vs Consensus: TP and earnings towards the lower end of consensus

• Trading volumes and value to be subdued before clear signs of recovery are visible

• Cutting volume and value assumptions; earnings trimmed by 16-25% over FY12-13

• Downgrade to Fully Valued, TP lowered to S$5.40.

Challenging environment ahead. Trading volumes tend to increase as de-risking takes place but as recessionary risks accelerate, trading volumes and values tend to dissipate. Similar trends were seen in 3Q08 (SGX: FY1Q09) – post Lehman collapse – where trading volumes and values peaked and subsequently tapered down until 2Q09 (SGX: FY4Q09) when the global recovery became visible and confidence restored in the equities market. Derivatives activities tend to pick up during volatile times but soften thereafter. With market outlook looking grim, it appears challenging for trading volumes and values to hold up.

Earnings cut by 16-25% over FY12-13. Against this backdrop, we cut our securities daily average volumes and values to 1.32bn and S$1.45bn from 1.89bn and $1.83bn in FY12; and to 1.42bn and S$1.40bn from 2.08bn and S$1.98bn in FY13. Our FY12-13 earnings are reduced by 16-25%. We assume velocity at 60%. Our 90% dividend payout ratio is maintained which provides a decent 4-5% yield to SGX. SGX will be announcing its 1QFY12 results on 17 Oct (pm). We estimate 1QFY12 net profit at S$85m coupled with a 4 S cts base DPS.

Downgrade to Fully Valued with TP lowered to S$5.40. SGX is currently trading below its 5-year historical mean PE multiple at 21x (calendarised) forward EPS vs the STI trading below -1 SD. Our revised TP of S$5.40 is based on the DDM model assuming 90% dividend payout, 6% growth (from 8%) and cost of equity of 11%, which implies 18x target PE to CY12 EPS of S$0.31. By applying its 5-year historical trough PE of 12x (in Mar 09), we derive a bear case TP of S$3.80.