SGX – Phillip

Strong derivatives volume marred by record low SDAV

  • Securities Daily Average Value (SDAV) hit a historical all-time low of S$0.97b for 1Q15, a decrease of 14% q-q and 27% y-y based on SGX figures. We are seeing yet another quarter of supressed trade volumes and we believe this will continue to stretch into a seasonally weak 2Q.
  • Factoring in 1Q15’s lower SDAV, we trimmed our FY15 forecasted SDAV, leading us to revise our FY15 EPS downwards slightly.
  • Derivatives business had a strong quarter with Derivatives Daily Average Volume (DDAV) growing 9.4% q-q to 0.45 million contracts and 7.7% y-y. This was led by exceptional volumes from the FTSE China A50 contracts which saw a 60.5% growth q-q and more than twice the volume y-y.
  • In the long run, we are still encouraged by the structural changes being introduced, namely the MM and LP programmes and board lot size reduction, helping to stimulate growth in trade volumes and improving liquidity.
  • Upgrade to “Accumulate” with revised TP of S$7.30, based on slightly revised EPS and PE multiple of 23X FY15 earnings


What is the news?

SGX Ltd will be announcing its 1Q15 results on 21 Oct 2014. Based on monthly statistics recently released by SGX, 1Q15’s SDAV declined 14% q-q to S$0.97 billion. DDAV grew in 1Q15, increasing 9.4% q-q to 0.45 million contracts.

How do we view this?

We expect Securities Revenue to decline as SDAV has dipped by 14% q-q but the impact should be cushioned by higher average clearing fees with the removal of capped trades (S$600). Derivatives Revenue should be stronger this quarter with the 9.4% q-q growth in DDAV. This was a record quarter for the FTSE China A50 Index Futures (+60.5%) which was the main driver for overall volume expansion. The A50 contracts now constitute 41% of total equity index futures volume as compared to 29% in the previous quarter. We also note that albeit the minimal impact on overall derivatives revenue, forex futures volume are gradually taking off, especially so for the INR/USD futures (5X q-q). With RMB forex futures coming in as well (20 Oct 14), it could be a sound compliment to RMB-denominated investment products. Listing revenue will be another positive this quarter given the stronger pipeline of IPOs (S$1.9b raised in 1Q15), which will help to alleviate the weaker securities revenue.

Depressed securities activity levels continue to pose as a near-term drag for SGX. A weak start to FY15 and an upcoming seasonally weaker 2Q has led us to trim our FY15 projected SDAV. The Derivatives business remains a bright spark and key growth driver in the medium to long term and we estimate derivatives revenue could overtake securities revenue this year. Key re-rating catalyst will be a sustained pick-up in market volumes from external macro drivers and the success of the SGX introduced measures for boosting liquidity, IPOs and take-off of new derivatives products launched.

Investment Actions?

We trim our FY15/FY16 EPS estimates slightly by 3%/5%. Dividend yield is currently attractive at 4.4%. Based on a multiple of 23X FY15 earnings, our target price is revised to S$7.30 and we upgrade our rating to “Accumulate”.

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