Singapore Exchange - Strong recovery in the final quarter

Singapore Exchange (SGX) will announce its FY09 full-year results on 5 August. We expect net profit to drop 33% yoy to S$319m mainly due to a contraction in average daily turnover (ADT) from S$2.12b in FY08 to S$1.26b in FY09. Derivatives revenue was largely stable as the number of derivatives contracts traded on SGX was largely unchanged at 55.5m in FY09 vs 53.5m in FY08. Nonetheless, SGX staged a major comeback in 4QFY09 with an estimated 76% qoq increase in net profit as ADT surged 90% qoq to S$1.73b.

While our assumed turnover velocity in FY10 remains largely unchanged at 96.2% (vs 76.8% in Jun 09), total market capitalisation for shares listed on SGX went up from S$377b as at end-Mar 09 to S$533b as at end-Jun 09. Hence, we have to raise our forecast market turnover. We raise our ADT assumptions for FY10 (from S$1.43b to S$2.03b) and FY11 (from S.1.46b to S$2.13b). As a result, we raise our FY10 and FY11 earnings forecasts by 35% and 39% respectively.

We raise our fair price from S$7.00 to S$9.50 (23.5x FY10 PE). 23.5x PE was the average between the historical average PE and the average of the highest PE for every fiscal year since listing. As the current price represents only 10% upside, we recommend investors buy at a lower price. Entry price is S$8.20. Maintain HOLD.

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