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SGX

SGX and NASDAQ in dual-listings cooperation

Sounds like good news. I'm impressed by this CEO.

Published October 19, 2010

Brokers' Take

Singapore Exchange
Oct 18 close: $10.04
DMG & Partners Securities, Oct 18

SINGAPORE Exchange (SGX) reported a net profit of $74.2 million for Q1 FY2011 (the three months to end-September), down 21 per cent y-o-y. This represents 20 per cent of our FY2011 net profit forecast. The decline was due to securities revenue falling 17 per cent y-o-y to $71.2 million and operating expenses rising 15 per cent y-o-y to $68.1 million.

We believe earnings in the subsequent three quarters will be stronger than in Q1 FY2011 with the quoting of ADRs (American depository receipts) of 19 major Asian companies. However, this is more than priced into SGX's share price. Based on an FY2012 average daily turnover (ADT) assumption of $1.76 billion, and a PE rating of 22 times, we derive a TP of $7.90 (unchanged). SGX remains a 'sell'.

ADT was $1.56 billion, lower than Q1 FY2010's $1.73 billion. This was the main contributor to revenue weakness. Capped trades (that is, trades with contract values more than $1.5 million) accounted for 42 per cent of total trades, versus Q1 FY2010's 34 per cent, suggesting a higher proportion of institutional trades.

Its cost-to-income ratio rose to 42.8 per cent (from Q1 FY2010's 34.2 per cent). The $8.8 million y-o-y rise in expenses was largely attributed to system maintenance and depreciation expenses increasing by $7.5 million, and the accelerated depreciation of $1.6 million from the new Reach initiative. While overall staff costs were down one per cent y-o-y, we note that base staff costs (excluding variable bonus) rose 17 per cent y-o-y, with a 27 per cent fall in variable bonus providing the offsetting effect. Should ADT show weakness in subsequent quarters, SGX could have less flexibility to manage its cost.

SGX declared an interim dividend of four cents a share for Q1 FY2011.

A crucial factor for ADT trend in subsequent months is the quoting of ADRs of Asian companies on GlobalQuote starting Oct 22. The ADRs will be fungible. There will be six liquidity providers (three foreign and three local) that will help to provide the liquidity for these ADR trades. We believe that the impact will be greater for those ADRs/stocks such as Baidu and Ctrip.com that are currently not traded during Asian trading hours.

We have assumed that 8.8 per cent of SGX's FY2012 ADT would come from the trading of such ADRs. If the trading value of such ADRs comes in below our assumptions, we could see SGX's share price under-performing.
SELL

- Compiled by CONRAD TAN

The Business Times

October 19, 2010, 11.12 am (Singapore time)

DBS, OCBC raise target price for SGX

SINGAPORE - DBS Vickers has raised its target price for Singapore Exchange (SGX), Asia's second largest listed bourse, to $11.40 from $9.60 and maintained its 'buy' rating.

OCBC Investment Research has downgraded its rating to 'sell' from 'hold' on valuation grounds, but raised its target price to $8.60 from $8.35.

DBS said SGX's first quarter earnings were within expectations as market activity picked up only in September and did not offset the weakness in the July-August period.

SGX said net profit for the fiscal first quarter ended Sept 30 fell 21 per cent to $74.2 million (US$57.30 million) from $94.1 million a year ago, hurt by weak trading volumes in July and August and higher technology-related costs.

However, DBS expects further acceleration in SGX's market activity in its second and third quarters due to positive market momentum, coupled with the listing of American Depositary Receipts and other initiatives.

The brokerage also upgraded its earnings estimates by 6-7 per cent after lifting volume and value assumptions for SGX's 2011-2013 financial years.

OCBC said it has retained its $362.9 million profit estimates for SGX's 2011 financial year, taking into account its projection of a better second quarter.

According to Thomson Reuters' I/B/E/S estimates, SGX's 2011 financial year net profit is expected to be $379 million.

However, the brokerage said valuations for SGX and its regional peers have risen and are now close to almost previous peak valuations, which went as high as 35 times earnings.

'We are reluctant to accord such high valuations which were then partly fuelled by merger talks,' OCBC said in a report.

At 0228 GMT, SGX shares were down 0.9 per cent at $9.95 on a volume of 2.1 million shares. -- REUTERS