Investor Notes

Q2 earnings lend quiet confidence to SGX growth plan

The Singapore Exchange (SGX) building.
The Singapore Exchange (SGX) building.PHOTO: REUTERS

When Singapore Exchange reported its second quarter results last week, the key message highlighted for investors was that the bourse has remained resilient despite the choppy market conditions, and its strategies will be guided by a long term view.

This was in response to the public perception that SGX is running out of ideas to steer the local stock market out of stagnation.

While the slowdown in the securities segment looks to persist, the latest quarterly earnings did lend some credibility to SGX's quiet confidence, as its plans for diversified, multi-asset growth seem to be slowly bearing fruits.

Top, bottom line still intact, for now

For the three months to Dec 31, SGX reported $194.6 million in revenue, on par with the $195.1 million turnover from a year ago. Net profit was down slightly, by about 3 per cent year-on-year to $83.7 million.

It was by no means a poor performance, given the bearish sentiment that shrouded the regional markets in recent months, chief executive Loh Boon Chye said.

Indeed, the quarterly net profit was between 5 per cent and 6 per cent above CIMB's estimate as SGX was able to keep its expenses under control, the bank said in a note on Jan 21.

But there are questions on how sustainable these earnings will be, with the changing interest rate landscape, commodity down cycle and China's slowdown putting a lid on investment activities.

"Though the second quarter results were a slight beat, we cut the earnings per share for financial year 2016 to 2018 in expectation of lower securities and derivatives volume in the second half," CIMB analysts cautioned.

Securities vs derivatives

Eagle-eyed investors and market watchers would have noticed the divide between SGX's slowing securities businesses and growing derivatives unit.

That divide remained in the second quarter, when SGX reported a 10 per cent year-on-year drop in securities revenue to $46.6 million, while derivatives revenue grew 1 per cent to $77.6 million. They contributed to 24 per cent and 40 per cent of total revenue respectively. Derivatives businesses are now clearly SGX's key earnings driver.

Within the securities segment, an 11 per cent year-on-year drop in the daily average traded value to $930 million further underlined the stock market sluggishness. The number of new listings also dropped to five from 14 a year ago.

However, the external backdrop should not be ignored, and retail market participation has remained active, equities and fixed income head Chew Sutat said.

"One thing we need to be conscious of is that last year, especially in December, the market has been seasonally tough. But when adjusted for market cap, the inherent quality of the (retail) market has been doing quite well," he told analysts in the results briefing.

Mr Loh added that SGX will continue to rely on its sectorial strengths to attract new listings. This implies that SGX will not give up on marine and offshore companies despite the energy market collapse; real estate investment trusts, a SGX specialty, will also be targets to woo this year.

Long term growth, diversified business mix

But Mr Loh, who took over from Magnus Bocker just last June, has more than just reviving the stock market in mind. His priority is to build SGX into a multi-asset marketplace, and the management is willing to be patient for the strategies to bear fruits, Mr Loh said during the briefing.

The objective is to build SGX into a choice venue for a diverse set of investment assets besides equities. A big part of that focus will be on fixed income, as seen from SGX's ongoing push to expand its derivative contracts.

If executed well, the strategy may provide SGX with a wider revenue stream and a competitive edge over the regional bourses, even as the going gets tough in the securities segment.

From Bond Pro launched last month to create a platform for over-the-counter bond trading, to the creation of new index business in October in a bid to attract more exchange traded funds, SGX is slowing putting the pieces together to build one of Asia's most comprehensive exchange offerings, beyond just the bricks and mortar of stock market.

Mr Loh acknowledged that earnings contribution from these initiatives is only marginal now.

"But we need to stay the course on measures that we think will benefit the market. Let the measures take root before we consider other more drastic changes. To expect almost immediate results in not practical," he told the Straits Times.

It remains to be seen how well Mr Loh's vision can synergise growth for SGX. But investors perhaps can find comfort in seeing that at least the management has a clear direction, and the intention to follow through.

Tightening up coffer for the rainy days

Meanwhile, it should help that SGX is slimming down its huge expenses to weather the difficult times.

Operating expenses for the current financial year will be around $415 million to $425 million, down from the previously forecast range of $425 million to $435 million.

In the second quarter, expenses only grew $3 million to $97 million compared to a year ago, and lower than the $102 million spent in the first quarter.

SGX has changed its expense guidance for the rest of the financial year, including the decision to drop the plan to expand its current office space in 2016. Discretionary costs will also be tightened up in the second half of the financial year, chief financial officer Chng Lay Chew said.

With better cost management to build a buffer, and a plan to build future growth, SGX as a firm is not in a bad place - certainly not as bad as its share prices imply.

"Year-to-date, SGX's share price has shed 14 per cent, underperforming the 11 per cent drop for Straits Times Index. Valuations on forward price earnings and price to book basis are currently very attractive," DBS Group Research said in a note last week, giving SGX a buy call.