Singapore Exchange Limited - When will securities revenue pick up?

29/1/2014 – Brokers continue to stay bullish on the Singapore Exchange (SGX), even after announcing a 2% fall in Q2 profits.

They believe that as global sentiments improve this year, the bourse will see an increase in revenue from securities trading and, of course, derivatives.

CIMB Research maintained its ADD rating with target price trimmed from S$8.56 to S$8.51 a share, after reducing earnings estimates slightly.

Macquarie Equities Research retained an OUTPERFORM rating with a 12 month price target of S$7.87.

It believes that revenue diversification should allow SGX to reduce the risk of high correlation with trading volumes on the cash equities market.

The future in derivatives trading and clearing is still bright.

PhillipCapital Research maintained its BUY rating with a target price of S$7.67.

However, the analyst highlights that SGX's performance is more dependent on current market volumes in the near term.

OCBC Research has maintained its HOLD rating after trimming the target price from S$7.43 to S$7.22.

However, this is still above the current market price of S$6.92.

The analyst expects Q3 to be no less challenging for its securities business than the previous quarter.

Among some of the key concerns is its expectation of weaker property data, which could curtail trading interest in property and property-related stocks.

However, it expects the 28 cent-a-share dividend payout to be maintained, giving a yield of 4%.

SGX expects operating expenses between S$320 mln and S$330 mln in FY14.

It will spend between S$35 mln and S$40 mln in the next six months on its new premises in Buona Vista, west of the Central Business District.

The company announced these earnings for Q2 FY14:

Revenue: +1.7% to S$164.6 mln
Cost to income ratio 46.4% vs 44.3%
Operating profit margin 53.6% vs 55.7%
Profit: -1.8% to S$75 mln
Cash flow from operations: S$169.7 mln vs S$162.6 mln
Dividend: 4 cents per share vs 4 cents per share

Revenue from the derivative segment rose 16% to S$52.5 mln due to the popularity of contracts such as the FTSE China A50 futures, Nikkei 225 futures and options, and iron ore swaps.

However, revenue from the securities market fell 13% to S$52.2 mln, due to lower participation by both retail and institutional investors.

Various broking houses restricted investments in riskier small-cap stocks after the shares of Blumont, Asiasons Capital and LionGold tumbled.

Derivatives revenue reached par with securities revenue for the first time.

But the chart below shows that the growth in derivatives revenue is still not able to offset the pace of decline in securities revenue.

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

Question

1. What could help drive securities revenue?

Securities revenue fell 24% QoQ and 13% YoY, due to a 19% fall in daily average trading value of S$1 bln.

And this revenue figure was the lowest since Q1 FY11.

Equity turnover velocity at 35% was also the lowest since Q1 FY11's velocity at 62%.

However, the YoY drop was partly cushioned by a higher average clearing fee of 3.2 basis points (bps) versus 3 bps in Q2 FY13 due to an increase in uncapped trades.

Question

2. Will circuit breakers safeguard investors and help improve participation?

SGX will be introducing circuit breakers from February 24, 2014.

Circuit breakers will initially apply to Straits Times Index and MSCI Singapore Index component stocks, as well as all securities priced $0.50 or more.

This will also include stapled securities, funds, exchange traded funds, exchange traded notes and extended settlement contracts.

These account for about 80% of trade on the market.

Circuit breakers will be triggered when a trade is matched at a price that is more than 10% above or below the price at least five minutes earlier.

Once a circuit breaker is triggered, a five-minute cooling-off period follows where trading can only take place within a price band 10% above or below the reference price. Thereafter, trading resumes with a new reference price as established during the cooling-off period.

The aim is to enhance market stability and transparency after the spectacular crash of certain penny stocks in early October.

But does it mean that investors who have burnt their fingers in the past will come back to the market?

Question

3. How is participation in the ASEAN Trading Link?

The ASEAN Trading Link was launched in September last year.

The three markets - Singapore, Malaysia and Thailand - are host to around 3,000 listed companies with a market capitalisation of US$1.4 trillion.

(Total number of questions in the full story: 6)

We have sent these questions to media contacts at the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).

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