SGX - Lower earnings due to securities turnover plunge

Raised FY10 ADT assumption and SGX target price, but SELL maintained. SGX reported FY09 net profit of S$305.7m, down 36% YoY, in line with our forecast S$296m. The decline was mainly due to the 23% fall in operating revenue to S$595m. Given the strong S$1.58b ADT for Jul 09, we raised our FY10 ADT assumption from S$1.36b to S$1.47b. Correspondingly, we raise our FY10 net profit forecast by 3% to S$341.1m. Applying a 22x P/E multiple (similar to the 22x average over the past 4 years), we derive a target price of S$7.00 (versus previous S$6.20). Based on the current SGX share price of S$8.59, the market is imputing a FY10 ADT of S$2.0b, which we believe is unlikely.

Securities market revenue plunged 34% to S$299m. Securities market trading value (excluding derivative warrants) fell 42% to S$309m, with average daily turnover (ADT) falling a similar percentage to S$1.23b.

Derivatives trading was more resilient. Net derivatives clearing revenue was flat versus FY08 at S$156m. Whilst futures clearing revenue was up 8% to S$147m, structured warrants clearing revenue plunged 55% to S$9m. Futures trading volume rose 8% to 58.3m contracts, whilst structured warrants trading volume collapsed 60% to 46b units.

Final dividend of 15.5S¢/share declared. SGX is committed to an annual base dividend of 14S¢ from FY09 onwards. We are forecasting FY10 dividend of 28.9S¢/share, based on a 90% payout ratio (FY09 payout ratio was 90%). We see 22x P/E as fair. SGX hit a high of 37x P/E in Oct 07, when ADT was as high as S$3.0b and economic growth was robust. But we are now only emerging from economic contraction. Liquidity could drive equity market volumes in the short term, but we believe SGX could only hit those high P/Es when fundamental growth can be sustained. We believe a fairer P/E rating is the historical average of 22x.

Sponsored Links

Related Posts by Categories