What Happened
SGX is due to announce its 2Q results in two weeks’ time. We expect the results to reflect diminished small-cap activity compared to the prior quarter. 1QFY14 was carried by higher securities clearing rates when small-cap activity ballooned. A lot of that has since waned. Given this, coupled with the seasonal December lull, securities ADVT for 2Q was only S$1bn/day (-24% qoq). Lower securities clearing fees were the main reason for our expected 14% qoq decline in quarterly profits. However, derivatives activity held up decently.
What We Think
Derivatives where we are most positive. We are more positive about the derivative business vs. the cash equity business. Total derivative volumes (8.72m contracts/month) in 2QFY14 were relatively flat qoq but 18% higher yoy. SGX has consistently reported higher open interest, signalling great customer traction over the quarters. Catalysts ahead will be the new Philippines and Thai contracts as well as other new contracts. Listing fees increase lends tailwinds. The second earnings catalyst will be the effect of higher listing fees. This will have a more noticeable impact in
2H, when the full effect of the phased hike sets in.
What You Should
Do Low expectations a function of low turnover velocity. We believe that expectations for SGX are now very low and the stock remains a good hedge if markets do rally unexpectedly this year against a backdrop of competitive money-printing policies and recovering developed economies. SGX’s 2Q securities turnover velocity was a measly 32% (vs. 40-50% average during 2011-2013) and that low activity level is reflected in its current valuation of 18x FY15 P/E (less than 1 s.d. below mean). SGX’s long-term average P/E range is 19x (-1 s.d.) to 28x (+1 s.d.).
FV S$8.56
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