SGX’s sizeable derivatives business (35% of operating revenue for 9MFY09) differentiates it from other exchanges and gives it a more diversified and stable earnings stream. SGX’s futures & options business has been remarkably resilient even in the current slowdown.
Quarterly securities turnover bottomed in 3QFY09 and we expect a recovery in volumes in FY10. Turnover velocity rose to 88.2% for 4QFY09, higher than averages of 76.5% and 70.9% for FY08 and FY09 respectively. Increased algorithmic trading and higher retail participation are expected to drive future growth.
SGX now has a stable revenue stream (from membership fees, terminal & connection fees, price information fees and others) that is less susceptible to market trading volumes. This is expected to account for 22.4% of total operating revenue in FY10.
The appointment of a new CEO Magnus Bocker may accelerate SGX’s push into forming strategic partnerships and alliances with other exchanges. Currently, SGX has a 5% stake in Bombay Stock Exchange and Tokyo Stock Exchange has a 4.99% stake in SGX.
SGX’s advanced trading engines for securities & derivatives are a key competitive advantage. Its clear technology roadmap will ensure that it can support the increased needs of algorithmic and high velocity traders.
SGX has a strong balance sheet with substantial cash hoard (estimated at S$739mil as at June 2009). Given its strong operating cashflows and rising cash reserves, we will not be surprised if SGX pays a special dividend to shareholders in the near future.
SGX’s valuation is attractive on a regional basis. SGX’s prospective PEs of 23.8x and 20.3x for FY10 and FY11 respectively are below the averages of 28.1x and 24.5x for its regional peers even though its two-year EPS CAGR of 21.2% is higher (versus regional peer average of 9.6%).
Key risks include a possible decline in securities turnover. We estimate that an every 10% fall in securities volume will impact FY10 net profit by 7.7%. The threat of ECNs (including dark pools) should not be discounted but its impact is expected to be limited.
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