Derivatives revenues saw a second straight quarter of decline, by 27% q-q (2Q: -7%). Core Nikkei contract (comprising about 50% of total Asian equity derivatives contracts traded) experienced a deep slump over Jan-Feb (exacerbated by short trading months), while the Nifty contract saw a further 36% q-q drop in contracts traded (2Q: -46%) as investor interest in India remained low. However, significant recovery in broad futures trading activity was seen over March (+23% m-m) and continues to build into 4Q. The OTC clearing business via AsiaClear continues to show strong growth but from a small base, with net contribution at a modest S$2mn.
Notwithstanding a weaker-than-expected 3Q performance, SGX is expected to close the financial year on a strong note (securities and derivatives trading improving sharply in April) with the market to be a key beneficiary of improving financial market sentiment and declining risk aversion. In our view, SGX is a quality leverage play with attractive yield.
We derive our PT using a P/E-based method derived from the Gordon Growth model. We estimate cost of equity of 11.5%, market equity risk premium of 6% and stock beta of 1.6x. We derive a fair P/E of 19x, which when applied to FY10F (June year-end) adjusted net profit of S$415mn, gives a fair value of S$8.0bn. On the current share base of 1,072mn shares, this comes to a PT of S$7.40. Risks include another slump in market sentiment, a pickup in regional competition for listings and derivative contracts, and an SGX participant defaulting on its obligations.
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