Singapore Exchange - A recession soap opera is bad (CIMB)

Current S$6.24

Target S$5.93

Previous Target S$8.14

Up/downside -5.05%

A long-drawn recession is SGX’s bane. Although SGX benefits from current volatility, volumes suffer in a protracted recession when market interest peters out. Current share price have factored in that anticipated market lethargy though. We maintain our Neutral call, albeit with a lower DDM-based target price (r: 9.5%, g: 3.5%). Being overly bearish at this stage assumes REACH and derivatives initiatives will fail – too bearish. We cut FY12-14 ADT assumptions by 16-18% and earnings fall 12-14%. We would be convicted buyers at 16x CY13 P/E, or S$4.67.

Potential beneficiary of near-term volatility Securities and derivatives clearing form 65% of revenues. Trading volumes tend to pick up in times of volatility. Whilst equity markets crashed in 3Q, SGX 1Q12 ADT is up 9% qoq while derivative volumes are up 18% qoq. 1Q12 results is certainly no reason to sell the stock.

Mid-term pain from anemic trading volumes However, as the dust settles on the market, volatility dissipates and trading volumes dry up. In 2008-09, turnover velocity was at 70-90% in the initial months of the sell-off but slowed to 50% by Dec-08. We believe the same could happen. Potentially weak earnings in coming quarters should be expected, though to a certain extent, this is reflected in share price now.

New initiatives in place for longer-term growth Since his appointment in 2009, CEO Magnus Bocker has introduced various new initiatives to take SGX to the next level. SGX now boasts of the world’s fastest trading engine. It has also introduced new products and services and had some success in wooing international listings. We recognise these initiatives as management’s efforts to improve market breadth. As long as the listing pie grows and new participants (from REACH) come on-board, the structural limits to revenue continue to be pushed out.

Valuations are reasonable, but downside risks remain From its peak six months ago, SGX has shed 26%. Now, it trades at 21x CY13 P/E (after earnings cut), in line with its historical forward average. Against trough valuations, SGX is still 46% higher. We would be convicted buyers at 16x CY13 P/E, or S$4.67, a 13% premium from its 14.2x trough multiple.