SGX - Strong SADV After US Presidential Elections To Persist
- Since the US Presidential Elections in early November, there has been a marked pick-up in SGX’s SADV.
- November SADV of SGD1.3bn was 36% higher vs the average of SGD0.96bn from Jul-Oct. We expect the higher SADV to persist, as interest rate normalisation takes place.
- The 5 Dec launch of the Shenzhen-Hong Kong Connect could catalyse more trading of China A50 Index Futures, which account for a high-teen percentage revenue share.
- Maintain BUY with revised TP of SGD9.10 (from SGD9.04, 25% upside), pegged to FY18F P/E of 25x (1SD>1.5-year mean of 23.1x).
Sharp SADV pickup in November to persist.
- Securities average daily value (SADV), which had been lacklustre over the past few months, picked up sharply in November to SGD1.3bn vs the average SGD0.96bn during Jul-Oct. The sharp increase came about after the 8 Nov US Presidential Elections.
- We have assumed FY17F SADV of SGD1.27bn, on expectations of more trading activities – as the Federal Reserve (Fed) raises rates, more funds would switch to equities from fixed income instruments.
More trading volume for China A50 Index Futures going forward?
- For the derivatives business (~40% of SGX’s revenue), the 4MFY17 derivatives average daily contract (DADC) of 639,000 was lower than FY16’s 732,000. However, with the 5 Dec launch of the Shenzhen-HK Stock Connect, we expect stronger trading volumes for the China A50 Index Futures – where trading volumes account for ~ 40% of total derivatives trading volume. We are forecasting FY17 overall DADC to rise 7% YoY.
Acquisition of Baltic Exchange would also help improve SGX’s derivatives business, in our view.
- The acquisition was completed in early November. The despatch of consideration and payment of special dividend to Baltic Exchange shareholders should have been completed in late November.
- Whilst the acquisition would add a small 1% of net profit to SGX, it reflects SGX’s aim in expanding into new markets to grow its derivatives business.
SGX remains attractive.
- We peg our TP to a target FY18F P/E of 25x (1SD above the 1.5-year mean of 23.1x). This gives us a TP of SGD9.10, which is slightly higher than our previous SGD9.04 TP, as we roll over our target valuation to FY18.
- At the same time, our DCF methodology leads to a fair value of SGD9.15, which supports our TP. Note that SGX’s dividend yield of 4.4% is attractive, compared with the sovereign 10-year bond yield of 2.3%.
- We maintain our BUY recommendation on the stock.
- The key risk to our call would be global economic trends.