SGX

Kim Eng on 17 Jan 2012

2Q11 results in line with expectations. Despite the significant decline in profitability, this set of results should be seen in the context of a very challenging quarter in terms of market conditions. We believe SGX’s efforts to diversify its income over the past 24 months is evident in this set of numbers, helping to cushion profitability.

Decent profitability despite challenging conditions. Net profit came in at S$65.4m, down 12% qoq and down 25% yoy. SDAV (Securities Daily Average trading Value) during this quarter was just S$1.1b, a 37% decline yoy and almost comparable to the S$0.9b low in Jan-Mar 2009. Securities revenue was down 35% yoy as a result. Other major sources of revenue such as derivatives and depository services, however, held steady or grew, which helped cushion the overall fall in revenue.

Proactive approach. Management shared that they will continue being proactive in improving trading volume. One area of focus will be to improve retail penetration, which at 10% compares unfavorably to Hong Kong’s 30% or Australia’s 20%. The use of more market makers to improve liquidity is also currently being studied.

SDAV bottoming out in our view. The current quarter’s numbers (EPS: SG6.1 cents) therefore gives us a good gauge of SGX’s base profitability. Even in a worst-case scenario where SDAV continues to drudge along at the same levels, one would still expect full-year EPS of SG 24.4 cents, almost all of which we expect SGX is able to pay out as dividends. This translates to a decent dividend yield of 4% at current prices.

Maintain Buy. We keep our estimates and SDAV assumptions largely unchanged (FY12F: S$1.4b, FY13F: S$1.5b), around the premise that market conditions will improve in the second half of this calendar year. Our target price of S$6.90 remains pegged at 25x FYJun12F PER, implying a dividend yield of 4%. Maintain Buy.