Singapore Exchange - More than one way to grow income (KE)

Event

? Singapore Exchange (SGX) announced a very good set of numbers for 1QFY Jun12. Though securities daily average trading value (SDAV) stayed flattish as expected, revenue from the other sources grew by 21% YoY and 10% QoQ. This clearly illustrates that there is a structural growth story to SGX outside of the volatility of market trading conditions. Maintain BUY.

Our View

? First-quarter revenue stood at $178m, up 12% YoY and 11% QoQ. Net profit also grew by 18% YoY, reflecting SGX’s good cost control. The increase came despite SDAV staying flat YoY at $1.6b. As it is, securities accounted for 40% of total revenue in 1QFY Jun12, down from 45% a year ago. This is part of management’s drive to establish more predictable sources of income from derivatives, membership fees and

depository services, among others.

? Revenue from derivatives trading, in particular, was encouraging. Making up 24% of total revenue, it was a record quarter for this segment thanks to strong trading in several newly introduced options/futures. We note that revenue from derivatives have held steady over the past five quarters even while securities trading were fluctuating. Management also highlighted the need to focus on maintaining a tight regulatory

environment to ensure SGX’s competitiveness in the long run.

? We continue to see the steep decline in SGX’s share price as a good buying opportunity. We estimate that current prices imply almost a 5% dividend yield, given the solid cash flow which will improve further when capital expenditure for the REACH engine ends this year.

Action & Recommendation

We lower our SDAV assumption for FY Jun12 to $1.65b from $1.8b, but raise our assumption for non-SDAV revenue. Our target price of $7.80 remains pegged at 25x FY Jun12F, implying a 4% yield. With management’s various initiatives in place, SDAV will bounce back stronger than before and the time to buy is now when it is depressed. Maintain BUY.