Singapore Exchange - FY09: The future is more relevant

Singapore Exchange’s (SGX) FY09 net profit dropped 36% yoy to S$306m. The results were in line with our expectation. ADT dropped 42% to S$1.23b in FY09, leading to 34% yoy decline in revenue from the equity market. Nonetheless, SGX staged a major comeback in 4QFY09 with 65% qoq increase in net profit as ADT surged 84% qoq to S$1.68b.

While our assumed turnover velocity remains largely unchanged at 96.2% (vs 108.1% in May 09), total market capitalisation for shares listed on the SGX rose from S$533b at end-Jun 09 to S$605b at end-Jul 09. Hence, we lift our ADT assumptions for FY10 (from S$2.03b to S$2.24b) and FY11 (from S$2.13b to S$2.31b). As a result, we raise our FY10 and FY11 earnings forecasts by 13% and 12% respectively.

We raise our target price from S$9.50 to S$10.80 (23.6x FY10 PE). The 23.6x PE is the average between the historical average PE and the average of the highest PE for every fiscal year since SGX’s listing. While the A-share and H-share markets have stronger appeal to China enterprises than SGX (due to valuation gap and stronger market liquidity), SGX’s successful diversification strategy, as evident from its non-Singapore derivatives offerings, should ensure long-term growth. As our revised target price represents 27% upside from the current level, we upgrade the stock from HOLD to BUY.

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