18 April 2012

SINGAPORE EQUITY Investment Research

DMG & Partners Research FINANCE
Leng Seng Choon, CFA +65 6232 3890 sengchoon.leng@sg.oskgroup.com

3QFY12 Results Review

Private Circulation Only

SGX

SELL Price Previous Target S$6.72 S$5.40 S$5.40

Finance SGX operates the securities and derivatives exchange in Singapore and their related clearing houses. Stock Profile/Statistics Bloomberg Ticker STI Issued Share Capital (m) Market Capitalisation (S$m) 52 week H L Price (S$) Average Volume (3m) '000 YTD Returns (%) Net gearing (x) Altman Z-score Beta ROCE/WACC Book Value/share (S) Major Shareholders (%) SEL Holdings 23.3 SGX SP 2986.6 1071.6 7201.4 8.33 5.91 2378.2 9.6 Net Cash 10.7 1.08 3.40 68.2

Lower technology expenses kept earnings firm

Earnings above expectations due to lower expenses. SGX reported 3QFY12 net profit of S$77.8m up 0.6% versus 3QFY11s underlying profit. This is stronger than our S$71m forecast, largely due to the S$4.4m YoY decline in operating expenses. 3QFY12 ADT of S$1.46b is down 15% YoY, but up 30% QoQ. We forecast continued soft ADT of S$1.36b for FY12. However, we expect FY13 ADT to be stronger at S$1.60b. Given the lower expenses, we raised our FY12 net profit forecast by 2% to S$294m. A 4S interim dividend was declared, unchanged YoY. Maintain SELL with target price of S$5.40, pegged to 18x FY13 EPS, which is a discount to the historical 5-yr average PE of 24x (given the tough market conditions ahead), but sharply higher than the 2009 crisis low of 11x. SGX trades at a P/E ratio close to peers such as HKEx, and we see better long term earnings growth potential for HKEx. Hence, we recommend investors to switch from SGX to HKEx. Revenue declined 3% YoY, with the derivatives markets 10% YoY expansion a positive kicker derivatives account for 26% of SGX revenue, but it remains lower than securities share of 40%. Derivatives volume fell 0.1% YoY to 316k contracts daily average. Securities revenue was weak, falling 12% YoY. Operating expenses fell 6% YoY. Staff expenses increased 2% due to annual salary adjustments and new hires, and partly offset by staff attrition. Technology expenses were 10% lower YoY mainly due to pacing of project-related expenses. Our FY12 securities ADT assumption is close to 9MFY12s actual, but downside risk remains. Our earnings forecast assume FY12 and FY13 securities market ADT of S$1.36b and S$1.60b respectively. Our FY12 assumption is slightly lower than 9MFY12s S$1.39b, as numbers in early Apr have been relatively weak.
FYE Jun (S$m) Turnover Net Profit % chg YoY Consensus EPS (S) DPS (S) Div Yield ROE ROA P/E (x) P/B (x)
Source: Company data and DMG Estimates

Share Performance (%) Month 1m 3m 6m 12m Absolute -5.8% 10.2% 6.8% -16.8% Relative -5.0% 1.8% -0.6% -11.8%

6-month Share Price Performance

FY10 639.7 320.1 4.7% 30.1 27.0 4.0% 38.9% 22.7% 22.3 8.8

FY11 660.7 294.9 -7.9% 27.6 27.0 4.0% 37.8% 20.2% 24.3 8.7

FY12F 647.1 293.9 -0.3% 307.8 27.5 24.8 3.7% 35.0% 19.3% 24.4 8.4

FY13F 685.0 319.7 8.8% 340.0 30.0 27.0 4.0% 36.8% 20.5% 22.4 8.1

FY14F 707.8 333.6 4.4% 384.6 31.3 28.1 4.2% 37.0% 20.7% 21.5 7.8

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Figure 1: SGX Quarterly Profit & Loss

YE : Jun Turnover EBITDA Depreciation EBIT

3QFY11 168.8 103.4 (9.6) 93.8 83.3 (16.3) 67.0

2QFY12 148.1 89.0 (10.1) 78.9 79.2 (13.8) 65.4

3QFY12 163.6 102.8 (9.8) 93.0 93.8 (16.0) 77.8

Comments Securities market ADT was stronger QoQ

Pre-tax Profit Tax Net Profit Source : Company data

Net profit was above expectations due to lower operating expenses.

Figure 2: Sequential rebound for 3QFY12 securities market ADT

Source : Bloomberg data

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Figure 3: Mar 12 securities market ADT lower MoM

Source : Bloomberg data

Figure 4: Our SGX target price is pegged to 18x P/E, a discount to the 5-yr average of 24x, but higher than the 2009 low of 11x

Source : Bloomberg data

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Figure 5: Peers comparison

Name Asia Pacific HKEx SGX BURSA Msia NZX ASX Europe LSE DEUT BOERSE HKD SGD MYR NZD AUD 129.50 6.72 7.00 2.68 32.00 26.0 23.3 24.7 18.2 15.5 23.6 20.9 22.1 16.0 14.4 15.2 9.8 4.3 3.6 1.9 57.1 36.0 17.1 16.3 11.9 Local Curr Price @ 17-Apr-12 PE Curr PE Fwd PB (x) ROE (%)

GBp EUR

1068.00 49.48

11.8 10.5

11.7 9.7

2.7 3.1

15.4 28.7

United States CME NYSE EURONEXT NASDAQ OMX USD USD USD 280.19 27.47 24.78 16.0 11.4 9.3 13.9 9.2 8.2 0.9 1.1 0.9 8.7 9.3 8.0

Source: Bloomberg data (forecasts using consensus expectations)

Figure 6: SGXs target share price sensitivity to ADT

FY13F Base case 1.60 685.0 319.7 30.0 18 5.4

Stkmkt turnover % rise ADT (S$b) Revenue (S$m) Net profit (S$m) EPS (S) Target PE rating Target Price (S$)
Source: DMG estimates

25 2.01 757.0 378.7 35.5 18 6.4

50 2.41 829.0 437.7 41.0 18 7.4

75 2.81 900.9 496.8 46.5 18 8.4

(25) 1.20 613.0 260.7 24.4 18 4.4

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Figure 7: SGX Profit & Loss Year end: Jun (S$m) Turnover EBITDA Depreciation EBIT Pre-tax Profit Tax Net Profit Book/sh (cts) Div Payout (x) Growth (%) Turnover EBITDA Pre-tax Profit Net Profit Profitability (%) EBITDA Margin Pre-tax Margin Net Margin Future & option turnover (units)(m) Stock-market turnover (incl structured warrants) (S$b) ADT (incl structured warrants) (S$b) FY10 639.7 404.7 (26.1) 378.6 383.3 (63.2) 320.1 76.6 0.90 7.5 4.8 4.0 4.7 63.3 59.9 50.0 57.1 394.2 1.57 FY11 660.7 411.1 (37.6) 373.5 355.6 (60.7) 294.9 77.2 0.98 3.3 1.6 (7.2) (7.9) 62.2 53.8 44.6 65.7 414.4 1.64 FY12F 647.1 390.0 (40.0) 350.0 356.0 (62.1) 293.9 80.0 0.90 (2.1) (5.1) 0.1 (0.3) 60.3 55.0 45.4 72.0 341.0 1.36 FY13F 685.0 420.0 (41.0) 379.0 385.0 (65.3) 319.7 83.0 0.90 5.9 7.7 8.1 8.8 61.3 56.2 46.7 75.0 401.0 1.60 FY14F 707.8 438.0 (43.0) 395.0 402.0 (68.4) 333.6 86.1 0.90 3.3 4.3 4.4 4.4 61.9 56.8 47.1 78.0 421.0 1.68

Source : Company data & DMG estimates

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DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. As of the day before 18 April 2012, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) Nil b) Nil As of the day before 18 April 2012, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: Analyst Company a) Nil b) Nil DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N) Kuala Lumpur
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