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Initial Coverage: Recent Weak Stockmarket Turnover A Negative
Initial Coverage: Recent Weak Stockmarket Turnover A Negative
SINGAPORE EQUITY
Investment Research
FINANCE
NEUTRAL Initiate
Leng Seng Choon, CFA
+65 6232 3890
SGX Price SGD7.40
seng-choon.leng@dmgaps.com.sg
Target SGD6.60
16.00 Our sensitivity analysis shows that a 10% fall in ADT (from our FY09 base of S$2.05b) will
14.00 translate to SGX fair price falling to S$6.10.
12.00
FYE Jun (S$m) FY05 FY06 FY07 FY08f FY09f
10.00 Turnover 274.7 407.6 576.2 774.6 698.5
8.00 Net Profit 104.4 187.6 421.8 477.3 392.0
% chg YoY -21.5% 79.8% 124.8% 13.2% -17.9%
6.00
EPS (cents) 10.1 18.0 40.0 44.8 36.8
4.00
DPS (cents) 24.6 16.2 36.0 37.5 33.1
2.00 Div Yield 3.3% 2.2% 4.9% 5.1% 4.5%
-
ROE 23.1% 32.0% 37.5% 54.9% 42.2%
9-Oct-07 8-Nov-07 8-Dec-07 7-Jan-08 6-Feb-08 7-Mar-08 ROA 10.3% 18.9% 22.2% 25.8% 20.8%
PER (x) 73.3 41.2 18.5 16.5 20.1
P/BV (x) 16.2 13.2 9.5 8.7 8.3
DMG
OSK Research
See important disclosures at the end of this publication 1
TABLE OF CONTENTS
Balance Sheet 9
Cash Flow 10
Disclaimer 11
DMG
OSK Research
See important disclosures at the end of this publication 2
Earnings Dependent on Stockmarket Turnover Value
The securities market clearing fees is an important component of SGX’s revenue. In FY07, securities
clearing fees accounted for 38.3% of revenue, and this has risen to 40.8% in 2QFY08. Effective 1 Mar 07,
the security clearing fee rate was lowered from 0.05% to 0.04%, and the cap raised from S$200 to S$600.
Securities market turnover, which has been volatile over the past 2-3 years, is the key determinant of
securities market clearing fees. In the recent months, securities market turnover has fallen eg Feb 08 ADT
is down 19% yoy and 22% mom.
(S$m) ADT
Jul06 895
Aug06 964
Sep06 959
Oct06 1,221
Nov06 1,348
Dec06 1,320
Jan07 1,986
Feb07 2,185
Mar07 1,834
Apr07 2,213
May07 2,194
Jun07 2,568
Jul07 2,953
Aug07 2,650
Sep07 2,288
Oct07 3,032
Nov07 2,424
Dec07 1,787
Jan08 2,265
Feb08 1,774
Mar08* 1,797
* Till 25 Mar 08
Source : Bloomberg
DMG Research
See important disclosures at the end of this publication 3
Fig 3 : Securities market turnover has fallen in recent months
3,500
3,000
2,500
2,000
S$m
1,500
1,000
500
0
Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08
Source : Bloomberg
QDII investments in SGX-listed equities. In late Jan 08, the Monetary Authority of Singapore said it had
agreed on a supervisory cooperation agreement with the China Banking Regulatory Commission (CBRC)
to allow Chinese commercial banks to conduct investments for their clients under the Qualified Domestic
Institutional Investor (QDII) programme. This could potentially generate growth for stockmarket turnover in
the future. However, there was no mention of when QDII funds could start investing in Singapore, and
CBRC also said it would sign similar pacts with the US, Germany and Japan. Overall, we have assumed
muted impact over the next few quarters.
More IPOs in 1HFY08. There were 44 new listings in 1HFY08 (versus 28 in 1HFY07) with a total market
capitalization of S$14.7b, raising S$4.9b. The REITs sector was also bolstered by the listing of SGX’s first
Japanese REIT. This brought the total market capitalization of the 19 REITs to S$26.7b. However, given
the weak market conditions in 2HFY08, we expect the number of IPOs to slow down in the months ahead.
The minimum bids were reduced in Dec 07 to improve trading efficiency and market liquidity. Also, the
recently revamped STI and the new indices should stimulate the development of more index-related
products. The planned introduction of the new trading engine in Jul 08 will help drive more algorithmic
trading in the market as well.
DMG Research
See important disclosures at the end of this publication 4
We assume marginal pick-up in stockmarket turnover from current levels. Given the likely
development of more index-related products, we are assuming FY09 securities market ADT of S$2.05b,
slightly stronger than the S$1.80b recorded for Mar 08. However, this is sharply lower than Oct 07’s ADT
peak of S$3.03b. Our assumption is consistent with the recent trend of stockmarket turnover velocity
having fallen from as high as 1.0x in Oct 07 to Feb 08’s 0.5x.
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08
Source : Bloomberg
2QFY08 derivatives clearing fees of S$38.6m was 40% higher yoy, due to growth in futures trading volume
and structured warrants turnover. However, its share of operating revenue fell to 19% in 2QFY08 (from
FY07’s 20.3%) due to the stronger growth in securities clearing fees.
Source : Company
DMG Research
See important disclosures at the end of this publication 5
SGX is fairly valued
We are forecasting weaker FY09 net profit, primarily due to expectations of lower securities market
turnover. This period is thus similar to that in FY05, when securities market turnover also declined yoy.
Over the past 2-3 years, SGX has been recording rising earnings on the back of growth in securities market
turnover and its PE ratio over this period is in the 25x region - we feel that pegging target price to this ratio
is not appropriate as we are in a period of earnings decline. We observe that SGX recorded a 15% fall in
securities market turnover value in FY05, which consequently led to earnings decline – and SGX traded at
16x PE for FY05. However, given SGX’s initiatives to promote securities trading, we are applying a higher
18x PE ratio to our FY09 earnings forecast, which yields our price target of S$6.60. Initiate coverage with a
NEUTRAL call. BUY below S$5.60.
SGX PE
45
40
35
30
25
(x)
20
15
10
0
1/1/04 7/1/04 1/1/05 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08
Source : Bloomberg
FY04 100.3
FY05 (14.5)
FY06 61.0
FY07 56.8
Source : Bloomberg
We assume 90% dividend payout ratio. SGX aims to declare a base dividend of at least 3¢ per quarter.
SGX has also guided (1) a dividend payout ratio of at least 80%, or (2) 12¢ per share, whichever is higher.
For FY07, SGX’s dividend of 36¢ per share represents a 90% dividend payout ratio, and we have
consequently assumed the same 90% payout for our forecasts. For FY08, we have applied a 90% payout
ratio – excluding the S$34m transferred to Derivatives clearing fund reserve that is not available for
distribution as dividends. Our FY09 dividend forecast is 33¢, which gives a 4.5% dividend yield. This may
appear attractive. But we believe this is offsetted by the risk of lower securities market turnover (due to
economic uncertainties in the US).
DMG Research
See important disclosures at the end of this publication 6
As stockmarket turnover values can be volatile, we have constructed a sensitivity table showing scenarios
with different stockmarket turnover values. Our base case target price of S$6.60 is based on FY09
average daily stockmarket turnover of S$2.05b. However, if turnover is 10% higher, then a fairer SGX price
would be S$7.10. If, on the other hand, turnover is 10% lower, then SGX fair price would be S$6.10.
388 HK Equity HKEx HKD 127.00 17,484.9 22.0 21.5 18.2 4.0
SGX SP Equity SGX SGD 7.28 5,628.3 14.0 17.2 16.3 5.1
BURSA MK Equity BMB MYR 8.70 1,424.9 18.8 17.5 15.2 3.6
ASX AU Equity ASX AUD 38.34 6,039.8 21.8 17.6 16.3 7.0
Source : Bloomberg
Note : Forecast PE based on consensus figures
DMG Research
See important disclosures at the end of this publication 7
Fig 11 : Profit &Loss
Growth (%)
Turnover (13.1) 48.4 41.4 34.4 (9.8)
EBITDA (18.8) 67.8 51.7 45.5 (11.3)
Pre-tax Profit (18.9) 75.4 107.7 17.5 (17.0)
Net Profit (21.5) 79.8 124.8 13.2 (17.9)
Profitability (%)
EBITDA Margin 54.6 61.7 66.2 71.7 70.4
Pre-tax Margin 49.0 57.9 85.1 74.4 68.4
Net Margin 38.0 46.0 73.2 61.6 56.1
Future & option turnover (units)(m) 22.8 33.9 37.0 45.0 43.0
Stock-market turnover (S$b) 173.6 267.5 418.7 602.0 512.0
Daily avg stock-mkt turnover (S$b) 0.69 1.07 1.67 2.41 2.05
DMG Research
See important disclosures at the end of this publication 8
Fig 12 : Balance Sheet
Current Assets
Trade Debtors 490.8 290.0 913.0 879.0 893.0
Bank Deposits & Cash 117.9 246.0 613.7 699.8 745.2
Accounts under fund management 152.2 151.9 138.7 138.7 138.7
Others 36.2 36.7 37.0 54.0 55.0
Total current assets 797.1 724.5 1,702.3 1,771.5 1,831.9
Current Liabilities
Trade Creditors 490.6 296.0 921.8 911.8 945.8
Others 59.6 70.8 96.7 26.9 17.6
Total current liabilities 550.2 366.8 1,018.5 938.7 963.4
DMG Research
See important disclosures at the end of this publication 9
Fig 13 : Cash Flow
Profit before tax & share of JV 134.6 237.1 492.8 576.0 478.0
Adjustments for :
- Depreciation 15.2 14.3 16.3 18.0 19.0
- Net loss (gain) on investment (0.5) (10.3) (10.8) 0.0 0.0
- Share based payment expense 5.1 4.2 8.6 4.0 4.0
- Interest income (3.8) (5.1) (9.5) (3.0) (3.0)
- Others (2.9) 2.2 (110.3) 0.0 0.0
Operating cash flow before WC change 147.8 242.4 387.2 595.0 498.0
Net increase / (decrease) in cash held (334.4) 128.1 367.7 86.1 44.4
Cash at the beginning of the period 452.3 117.9 246.0 613.7 699.8
Effects of exchange rate changes 0.0 0.0 0.0 0.0 1.0
Cash at the end of the period 117.9 246.0 613.7 699.8 745.2
DMG Research
See important disclosures at the end of this publication 10
DMG & Partners Research Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of
any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser
before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.
The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor
accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to
change without notice.
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