SGX: Hold rating, target price is $7.12, says CIMB

Excerpts from analyst's report

CIMB analysts:  Kenneth NG, CFA & Jessalynn CHEN (left) SGX’s 1QFY15 net profit of S$77.6m was in line with our expectations, forming 98% and 24% of our quarterly and full-year forecasts, respectively. Earnings continued to be propped up by the derivatives segment, particularly the China A50 futures, as the securities market volumes remained weak. We keep our Hold rating, EPS estimates and DDM-based target price of S$7.12 intact as we expect market volumes to remain subdued in the near-term, especially given that 2Q is the seasonally weakest quarter.

1Q featured little surprises, with revenue declining 2.2% qoq due to lower securities market activity. Securities revenue fell 7.8% qoq, as securities ADVT fell to S$1.0bn (4Q: S$1.1bn). 1Q also saw the impact of the new securities clearing fee structure, which helped the securities clearing rate grow marginally by 0.1bp to 3.1bp.

Derivatives revenue continued to do well (+2.9% qoq), driven by demand for the China A50 futures and iron ore derivatives. However, the effective derivatives clearing rate fell by an estimated 20bp as collateral management clients became more efficient in their use of hedging tools. Due to the declining securities market activity, importance is increasingly shifting to derivatives, which now accounts for 32% of revenue vs. 29% from securities.

1Q featured little surprises, with revenue declining 2.2% qoq due to lower securities market activity.
NextInsight file photo.Shanghai – Hong Kong Stock Connect will be a positive 
The key attraction of the China A50 futures on SGX compared to the same product in the onshore market lies in the longer trading hours (till 2am), which allows investment managers to manage their exposure to the China market even after market hours in Asia.

We believe the launch of the Shanghai – Hong Kong Stock Connect will be a positive for SGX’s China A50 volumes, as demand for the product as a means of hedging is likely to increase with capital flows into the A-share market.

Securities will be a longer-term story 

SGX attributed the poor securities market activity to the lack of market volatility, which approximately halved yoy to 6% in 1Q. SGX plans to add new products to improve volumes, while the new market maker and liquidity provider programme is expected to help increase market liquidity and depth (the programme contributed 12% of 1Q’s ADVT). However, we believe SGX’s efforts to transform the securities market will take time.

We expect market volumes to remain subdued in the near-term, especially since 2Q is seasonally the weakest. We maintain our FY15 securities ADVT estimate of S$1.1bn; a 10% increase in ADVT would result in 7% upside to our FY15 earnings forecast.