Singapore Exchange: Raised fair value to S$8.35

FY09 results came in slightly better than expected. Singapore Exchange Ltd's (SGX) posted FY09 earnings of S$305.7m (-36% YoY) which came in slightly above market expectation of S$297m (from Bloomberg). This meant 4Q earnings of S$91m, flat YoY but +65% QoQ. This was evidenced from the strong trading activities in May. FY09 revenue fell 23% YoY to S$594.8m, with declines in all three key segments; Securities Market Revenue -34%, Derivatives Revenue +0.2% and Stable Revenue -14%.

While IPOs and the average trading value fell in FY09, higher secondary capital raising activities helped to prop up the Securities Market. Total group operating expenses fell 5.6% YoY to S$227.6m, giving FY09 operating profit of S$367.3m. Management has declared a final dividend of 15.5 cents (quarterly base of 3.5 cents and a variable dividend of 12 cents), giving full year dividend of 26 cents (FY08: 38 cents), or a payout ratio of 90%. Based on yesterday's closing price, dividend yield is 3.0%.

Outlook is uncertain, but showing more positive signs. Although average daily trading volume has tapered off from May's peak, the recent rally has boosted interest and is a reflection of the growing confidence in the economy and the equity/derivatives market. IPOs are also slowly tickling back into the Singapore market. With the recent infusion of liquidity into the market, we expect this to translate into more capital market activities which will in turn buoy SGX's revenue. Taking into account improving economic outlook and better sentiment, we have raised our FY10 earnings by 6% to S$333m. In addition, we are also introducing our FY11 forecast and are projecting earnings of S$381m, up 14.5%.

Raised fair value to S$8.35. We do not expect the transition to the new CEO at the end of this year to bring about dramatic changes at SGX. We expect SGX's key drivers and objectives to remain on developing new products and growing its existing businesses (including working on more strategic working relationships). With the recent rally in the market, SGX and its regional peers have similarly been re-rated, and are trading at an average PER of 29x (range from 17-50x). We are raising our peg from 20x to 25x (but still below peak valuation of more than 30x), giving a fair value estimate of S$8.35 (previous: S$5.60). At current price, we are maintaining our HOLD rating on the stock.

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