Derivatives and stable revenues, together 50% of operating revenue, underperformed. Traded contracts saw broad rebound over 4Q but at shallower pace than expected, while stable revenue remains hobbled by weak corporate activity and IPOs, the latter standing at just 15 for the whole of FY09 compared to 60 in FY08.
New products (eg, OTC clearing, single stock futures) and the accompanying infrastructure (ie, new trading, clearing and data engines) are delivering positive, increasingly diversified revenue traction (eg, algo trading is now 21% of derivatives volumes vs 14% in Dec) but progress remains incremental. While opportunities in areas like CDS clearing and dark pools are being explored, SGX will remain hostage to DVT expectations well into the medium term.
We derive our price target using a P/E-based method derived from the Gordon Growth model. With market equity risk premium and stock beta pegged at 6% and 1.6x respectively, we estimate cost of equity of 11.5%. We derive a fair P/E of 19x, which when applied to FY10F (June year-end) adjusted net profit of S$415mn, gives a fair value of S$8.0bn. On the current share base of 1,072mn shares, this comes to a price target of S$7.40. Risks include another slump in market sentiment, which would depress trading interest and hence, clearing fees. A pick-up in regional competition for listings and derivatives contracts would stunt SGX’s growth appeal, given its drive to become the region’s primary pan-Asian listing and derivatives market. Finally, an SGX participant defaulting on its obligations could potentially threaten the entire system though this risk is mitigated by imposition of safeguards ranging from position limits and circuit breakers to margin requirements.
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