3QFY09 earnings weak, as expected. Net profit was dragged down by all segments, especially securities trading. Average daily trading volume and value fell 11% and 12% q-o-q, respectively. Derivatives activity volume fell 21% q-o-q with reduced trading activity in MSCI Taiwan and CNX Nifty futures. The Nikkei 225 futures product held up the fort. Stable income was lower, mainly due to lower account maintenance and corporate action fees. Meanwhile, operating expenses were stable, as higher depreciation and system maintenance costs were mitigated by lower variable staff costs. We trimmed earnings by 4-7% after revising stable revenue.
Expect a pick up in FY10. Apr09 trading volume surged to 1.7bn, while trading value rose to S$1.3bn (3Q09: 1bn; S$946m). Our expectations of a market recovery in 2010 support our volume and value assumptions for SGX of 1.4bn and S$1.3bn, respectively.
Upgrade to Hold (from Fully Valued), after rolling over our valuation window to FY10F PE. Our target price is raised to S$6.15 based on 17.5x FY10F PE. This is derived based on a correlation relationship with market velocity, similar to our valuation methodology for HKSE. SGX is currently trading at 18x forward PE, which is above the mean PE of 15x since its listing in 2000. Our target PE of 17.5x is equivalent to an early mid-cycle PE. Supporting our call is SGX’s base dividend of 3.5cents per share. Based on 90% payout, FY09F and FY10F DPS should be 26cents and 32 cents, respectively, implying 4-5% dividend yield.
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