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Morningstar | SGX's Posts Mixed 1Q Result; Solid Derivatives Volume Offset Weakness in Securities Turnover

Narrow-moat-rated Singapore Exchange posted a mixed first quarter with stronger derivatives volume offsetting weaker equity turnover. Net profit of SGD 91 million was steady on the same period last year but weaker against last quarter. Dividend of SGD 0.075 per share was in line with the revised dividend policy. There is no change in the operating expense and capital expenditure guidance. We believe the recent weakness in the exchange’s share price provides a good opportunity to enter the stock. The exchange is trading at an 18% discount to our fair value of SGD 8.40, or 18.7 times fiscal 2018 price/earnings. While we acknowledge our unchanged equity turnover assumption for the full year appears optimistic based on the first-quarter result, we note that equity revenue only makes up 26% of total revenue. If we assume all things constant and equity trading value in the current quarter is repeated for the remaining three quarters, our fair value declines to SGD 8.10. A more pessimistic assumption of SGD 1 billion turnover, as was the turnover in September, for the remainder of the year will yield a fair value of SGD 7.80, based on our estimate.

We reiterate our thesis the focus for Singapore Exchange should be its derivatives offering, which reported a solid performance in the first quarter. Derivatives benefited from higher volatility in capital markets on concerns over the U.S. and China trade tensions. This has resulted in an increase in derivatives across both equity indexes and currency contracts, while turnover for energy contracts were also higher as energy prices also experienced a volatile quarter. For the equity indexes, this was mainly attributable to its China-related contracts such as the FTSE China A150. Daily average derivatives volume in the quarter was close to 865,000 contracts, compared with 821,000 last quarter and 722,000 the same period last year.

Weaker investor sentiments weighed on equity turnover in the first quarter, particularly in September, as daily average turnover dipped below SGD 1 billion for the quarter, the first time since December last year. Average daily turnover for the quarter was SGD 1.07 billion, compared with SGD 1.28 billion last quarter and SGD 1.16 billion the same period last year.