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Morningstar | Strong Derivatives Business Underpins SGX's Solid 2Q Result

Singapore Exchange’s second-quarter result reaffirms our thesis the derivatives business will continue to be the profit driver for the narrow-moat-rated exchange. The strong performance in derivatives cannot be said for the securities business as weaker investor sentiments saw daily average volume below SGD 1 billion for the quarter, a first since 2016. The latter is consistent with regional markets. Net profit was 9.2% higher at SGD 96.5 million against the same period last year.

Our forecasts are unchanged for now and we maintain our fair value of SGD 8.40. We note our derivatives volume assumptions are slightly below the current run rate, offset by more optimistic securities volume assumption. If our forecasts are adjusted to the current level and leaving our long-term assumptions unchanged, our fair value would decline slightly to SGD 8.20. At either valuation, we require a larger margin of safety and our 3-star rating remains unchanged. We continue to see the development of new derivatives contract as the main growth driver. The exchange added higher-grade iron ore swaps and futures contracts in the quarter. As previously noted, the exchange is also seeking to increase trading in its overnight session with the opening of new international sales offices. We expect the above initiatives to underpin derivatives volume growth for the exchange over the medium term.

Derivatives volume was materially higher during the quarter, or the fourth calendar quarter, compared with the same period last year as concerns over U.S. and China trade tensions resulted in higher demand for risk management tools. This was underpinned by SGX’s key equity derivatives contracts in Nikkei 225 and China A50 as the underlying equity indexes saw meaningful decline. We expect derivatives volume to remain buoyant in the second half given the high level of open-end interest at the end of the quarter. In the near term, we expect the derivatives business to benefit from volatility in capital markets as the deadline to U.S. and Chinese trade negotiations approaches, as well as the U.K.’s exit from the European Union. Concerns over slower global growth, translating into weaker corporate earnings, may also add to market volatility.