Singapore Exchange: Proxy to bull market; BUY

Higher trading volume in line, velocity may improve. The pick up in trading volume appears to be sustainable based on the trend over the last month. Given revived interest in equities, we also expect velocity to improve to 80% (from 70% previously), close to the peak in late 2007 and early 2008.

Upgrade assumptions and earnings. We raised FY09F volume and value assumptions to 1.2bn and S$1.1bn (from 1.0bn and S$950m) respectively, to reflect strong 4QFYJun09 market activity. In anticipation of the market gaining momentum towards FYJun10F, we raised FYJun10F volume and value assumptions to 1.8bn and S$1.7bn (from 1.4bn and S$1.3bn), respectively. We also raised ‘stable income’ by 5-8%, in view of higher market capitalisation as values revise upwards. In all, we raised earnings by 3-14% for FYJun09-11F. Correspondingly, DPS for FYJun09-11F are raised to 27cents, 35cents and 40cents (from 26cents, 32cents and 35cents) respectively, based on a 90% dividend payout ratio, which implies a 4-5% yield. Note that SGX has a base DPS of 3.5cents per quarter, with any shortfall made up in the 4Q of the financial year.

Cheapest exchange in the region, Buy. Although SGX is currently trading at 18x forward PE, it is still the cheapest stock exchange in the region. Hence, we upgrade SGX to Buy with a higher TP of S$7.80, based on 20x forward PE. This is derived from a correlation relationship with market velocity, like our valuation methodology for HKSE.

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