Weak quarter not an issue



 

 

 

We expect SGX to reporta relatively weak 2Qon 22 Jan. We estimate 2Q net profit declined14% qoq to S$79m. Thisis only expected as2Q is seasonally weak, with ADVT averaging only S$1bn/day.We trim our DDM-based target price to S$8.56 to reflect 1-4% EPS cuts.However, we maintain our Add rating. The tamequarter is seasonal and does not detract from the earnings catalysts for the stock, namely: 1) favourable trends in the derivative business,2) effect of the listing fees hike from 2HFY14onwards,and 3) anyunexpected market rally on the back ofmoneyprinting and developed markets?recovery.



 

 

What Happened



 



SGX is due to announceits 2Q results in two weeks? time. We expect the results toreflect diminishedsmall-cap activity compared tothe prior quarter. 1QFY14was carried by higher securities clearing rateswhensmall-cap activity ballooned. A lot of that has since waned. Given this, coupled with the seasonal December lull, securities ADVT for 2Q was only S$1bn/day (-24% qoq). Lower securities clearing fees were the main reason for our expected 14% qoq decline in quarterly profits. However, derivatives activity held up decently.



 

 

 

What We Think



 



Derivativeswhere we are most positive.We are more positive about the derivative business vs.the cash equity business. Total derivative volumes (8.72m contracts/month) in 2QFY14 wererelatively flat qoq but 18% higher yoy.SGX has consistently reported higher open interest, signallinggreat customer traction over the quarters. Catalysts ahead will be the new Philippines and Thai contracts as well as other new contracts.



Listing fees increase lendstailwinds.The second earnings catalyst will be the effect of higher listing fees. This will havea more noticeable impact in 2H, when the full effect of the phased hike sets in.



 

 

 

What You Should Do



 



Low expectationsa function oflow turnover velocity.We believe that expectations forSGX are now very low and the stock remains a good hedge if markets do rally unexpectedly this year against a backdrop of competitive money-printing policies and recovering developed economies.SGX?s 2Q securities turnover velocity was a measly 32% (vs. 40-50% average during 2011-2013) and that low activity level is reflected in its current valuation of18x FY15 P/E (less than 1s.d.belowmean). SGX?s long-term average P/E range is 19x (-1s.d.) to 28x (+1s.d.).

 

Would Warren Buffett Buy Singapore Exchange?

Written By Stock Fanatic on Tuesday, January 7, 2014

  ■ We have reduced our earnings by 2-3% following continued weak trading volumes. Key trends in December 2013 were as follows:

1) Equity markets (40% of revenues): December average daily turnover (ADT) was down -17% YoY at S$0.95 bn, and remained weak after November ADT of S$1.12 bn (+3%), well below the 2013 average of S$1.4 bn.

2) Derivatives markets (25%): Derivative volumes picked up again after having weakened recently (led by Japan), with volumes up +12% YoY in December 2013, but still ~19% below May and June 2013 highs.

3) Depository services (15%): These fees are more based on equity volumes than value, with volumes up 21% YoY in December.

4) Listings (10%): There was one new equity listing in the month, with bond listings still the main source of new fund raisings.

■ Investment case:

The key investment case for SGX is longer-term growth through both existing market growth and success in its strategy to become an Asian regional gateway, with derivatives being the medium-term driver, in our view. Nearer term, its fortunes are more linked to current market volumes.

■ Catalysts: 

Market trading volumes, IPOs and subsequent capital raisings and the success of new product launches (fx launched in derivatives).

 
Technical Analysis

Daily Chart

■ Valuation unchanged at S$8.25, implying 23x 12-month forward earnings (around its eight-year average). We see downside risk to consensus earnings and share price if equity volumes remain at these levels.(Read Report)

 

 

 

SGX derivatives trading reaches new highs in 2013

Singapore Exchange (SGX) today said derivatives trading reached new highs in 2013. It also saw growth in clearing activities while securities trading declined.

For January to December 2013:

 Stock market capitalisation declined 0.6% to S$940 billion. On a total return basis, including dividends, the Straits Times Index was up 3.26%.

 Total equity fund-raising grew 40% to S$6.3 billion. There were 27 and 26 IPOs in 2013 and 2012 respectively.

 Total bond fund-raising decreased 4% to S$176 billion. There were 465 and 390 new bonds listed in 2013 and 2012 respectively.

 Securities daily average value (SDAV) increased 10% to S$1.4 billion.

 ETF turnover tripled to S$3.2 billion.

 Derivatives total volume and daily average volume (DDAV) increased 40% to 112 million and 459,362 contracts respectively.

 Volume of SGX AsiaClear commodities almost doubled to 660,372 contracts and volume of iron ore swaps, futures and options cleared more than doubled to 590,648 contracts.

 Trading in China A50 and India Nifty futures reached a record year volume of 21 million and 16 million contracts respectively. Volume of Nikkei 225 futures trading also hit a record year high of 39 million contracts.



 

SGX: December 2013 Securities Turnover Was Down 16% To S$20 Billion Year-on-Year.