Singapore Exchange Limited - How much do the improved regulatory and risk management capabilities cost?

23/8/2014 – Singapore Exchange Ltd warns costs are going to rise substantially in the year ahead.

It says it expects operating expenses of between S$330 mln and S$340 mln, up from S$315 mln in the year just ended.

This 5% increase would be the same as it registered in the previous financial year.

SGX also plans to spend between S$50 mln and S$55 mln on investments in technology, which would be up at least 15% on the S$43.4 mln in the year under review.

That itself was 36.5% more than in the previous year.

The company that operates the Singapore stock market has launched new products, services and distribution channels, which it hopes will drive earnings.

The company just announced earnings for FY14:

Revenue: -4.0%% to S$686.9 mln
Profit: -4.6%% to S$320.4 mln
One-off gains/losses: S$4.9 mln vs S$9.8 mln
Cash flow from operations: S$358.6 mln vs S$418.9 mln
Dividend: 28 cents per share vs 28 cents per share

On the top line, the securities business was the only one to register declines.

It fell 18% to S$226.9 mln, and now makes up only one-third of total revenues.

Average daily volume (SDAV) dropped around 23% to S$1.14 bln, down from S$1.48 bln.

The reason was that retail investors avoided penny stocks after the October 4, 2013, crash in Blumont, Innopac, LionGold and others.

SDAV had held up at S$1.33 bln during Q1, but dropped to around S$1.07 bln for the remaining three quarters of the financial year.

SGX says it expects the securities market to recover in the year ahead, after what it acknowledged was a tough FY14.

Turnover velocity, which measures the health of the market, slumped by a quarter to 39% from 52%.

Volatility is expected to normalise, after the low volatility of the past three quarters.

Derivatives revenue now makes up 30% of revenue – almost as much as securities – rising 3% to S$208.7 mln.

The China A50, India Nifty and Iron Ore contracts all achieved record volumes, rising double digits.

Market data sales was up 4% and connectivity was up 3%, but together made up only about 11% of FY14 revenues.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How much do the "improved regulatory and risk management capabilities" cost?

On page 4 of the financial statements, SGX mentions that expenses increased 5% to S$315.2 mln, partly for “improved regulatory and risk management capabilities”.

Undoubtedly, this is an important area to be investing in.

The negative effects of the October 4 penny stock crash are well acknowledged by the exchange itself.

It impacted turnover velocity, therefore brought down SDAV, and partly led to the decline in group revenue.

Now, on November 22, SGX announced that it had promoted Richard Teng into the Chief Regulatory Officer role, effective January 1, 2014. He had deputised in that role since January 1, 2012.

Also at the beginning of 2014, Agnes Siew-Koh became the Chief Risk Officer.

Together with the FY14 financial statements, SGX also announced major changes to the way the market operates, such as reducing board lot sizes, implementing a minimum S$0.20 a share price for Mainboard listed companies, and others, starting January 1.

But for shareholders of the Singapore Exchange Ltd, the question remains: On what is it spending the money to avoid a repeat of the October 4 crash?

What additional capabilities has it brought on board toavoid a repeat, and how much are these new resources costing?

Question

2. What technology will SGX invest in?

Technology investment costs just keep rising.

Having already risen 36.5% over FY13, they are now expected to grow 15% in the year ahead.

What will SGX be investing in?

Total number of questions in the full story: 9)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.

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