Singapore Exchange: Too early to call for a recovery

3Q earnings fell as expected. Singapore Exchange Ltd's (SGX) 3Q net earnings of S$55.3m (-46% YoY and -26% QoQ) came in exactly in line with our expectation of S$55.9m. Revenue fell 31% YoY and 18% QoQ to S$119.8m, also in line with our expectation of S$119.2m. There were no surprises in SGX's 3Q performance as there were already indications of weaker quarterly performance. Securities Market revenue plunged 43% YoY and 21% QoQ to S$55.3m. Derivatives Revenue fell 20% YoY and 27% QoQ to S$31.2. Even its Stable Revenue was not spared and fell 3% QoQ to S$33.3m. What was heartening was the drop in operating expenses (- 3% QoQ) and the 9% QoQ decline in total staff costs. However, this was partially offset by higher depreciation expenses. Management has declared a 3Q dividend of 3.5 cents to be paid on 14 May 2009 (note the book closure date is 4 May 2009)

Too early to call for a recovery. Average daily volume on the Securities Market was around 1 bn units in Jan-Mar 2009, but has since picked up during the first two weeks of April to 1.76 bn. Average daily traded value has also improved from S$947 bn to S$1300 bn. However, it is still too early to call for a recovery as uncertainties still loom. While some indicators have shown signs of bottoming-out, our view remains that a sustained economics recovery is necessary for confidence to return to the market. As such, we are unlikely to see a return to the peak volumes seen in mid-2007 any time soon.

Retain FY09 estimates. As the 3Q numbers came in within our expectations, we are retaining our FY09 earnings forecast of S$280.4m or 4Q earnings of S$65.9m (up 19.2% from 3Q). Management outlined that SGX will continue to grow the domestic derivatives (including extended settlement contracts) and the options markets. On the operational side, cost containment will continue to be a key focus. On the business side, corporate activities and capital market exercises remained slow. As the decline in global equity markets has stabilised for now, the outlook is better than 3 months ago and we are also raising our valuation to 20x (to be in line with peers as well as to account for better outlook compared to a quarter ago). Based on this, we are raising our fair value estimate to S$5.60 (previous: S$4.50). We retain our HOLD rating.

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