Excerpts from analyst's report

RHB Research analyst: Leng Seng Choon, CFA

350 1sgxTimely To Relook At This Monopoly With Net Cash

We are upgrading SGX to BUY with a SGD8.13 TP (13% upside). The amount of SGD1.18bn in securities ADT in the past three months was in line with our SGD1.17bn FY16 assumption; August derivatives volume surged 80% YoY (-14% MoM), but share price has fallen by 7.6% over this timeframe.

We believe the negatives have been largely factored in. Being a monopoly with a net cash position offers it resiliency. 

» Securities market’s average daily turnover (ADT) remains respectable. 1QFY16 (Jun) securities market ADT of SGD1.18bn was 8% higher than FY15’s. We maintain our FY16 and FY17 securities market ADT assumption of SGD1.17bn and SGD1.27bn respectively.

» August derivatives volumes doubled YoY. The China A50 Index Futures average daily volume of 403,000 in August was 35% lower MoM, although it represents a sharp 124% YoY spike.

Correspondingly, the August total average daily derivatives trading volume of 814,000 was down 14% MoM but up 80% YoY – this is higher than our 754,000 assumption for FY16. The recent softness of the Chinese equities markets has contributed to the China A50 Index Futures’ trading volume weakness and this volatility could add to Singapore Exchange’s (SGX) earnings fluctuations.

"Limited share price downside risk, but good upside potential.  If we assume unchanged securities ADT, but a P/E compression due to market conditions (setting a fair P/E at -2SD, we get a fair P/E of 20x, which would put SGX’s share price at ~SGD7.00. Whilst the company traded around 14x P/E during the global financial crisis (2H08), we do not expect as severe a P/E compression this time around." -- Leng Seng Choon, CFA

» We roll forward our valuation to factor in FY17 earnings. Setting a 23x target FY17F P/E (a slight discount to the 5-year average of 25x), we derive a SGD8.13 TP vs our previous SGD7.58 TP.

This is pegged to 22x FY16F P/E. Using DCF as a corroborative valuation methodology, we derive a SGD8.20 fair value, which is close to our P/E-derived TP.

 We consider SGX is also attractive, given the company’s forecasted dividend yield in excess of 4%.

Full report here.

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