SGX net profit fell 19% to $75m in 2QFY14

Here's what to blame.

According to OSK, SGX’s 2QFY14 results were soft, primarily due to challenging conditions in the securities market.

SGX’s 2QFY14 net profit of SGD75m (-2% y-o-y; -19% q-o-q) was slightly below OSK's and consensus estimates, with 1HFY14 net profit of SGD167m (+11% y-o-y) accounting for 45-46% of our and consensus’ full-year net profit estimates respectively.

Here's more:

However, derivatives revenue was stable q-o-q, making up 32% of total revenue, similar to contribution from the securities market. We tone down our earnings forecasts by 4-5% due to lower ADT assumptions while revising lower our FV to SGD7.80 (23x CY14 EPS) from SGD8.10. Maintain NEUTRAL call.

2QFY14 results slightly miss estimates. 2QFY14 was a tough quarter for the securities market as average daily turnover (ADT) fell 17% y-o-y and 25% q-o-q to SGD1bn as a result of weaker participation from both retail and institutions.

Derivatives revenue now as large as securities revenue. Securities revenue fell 24% q-o-q and 13% y-o-y due to weaker ADT, but the y-o-y drop was partly cushioned by a higher average clearing fee of 3.2bps (2QFY13: 3bps; 1QFY14: 3.2bps) due to an increase in uncapped trades.

Turnover velocity was also weaker at 35% (2QFY13: 45%; 1QFY14: 47%). Derivatives revenue, however, inched up 2% q-o-q (+16% y-o-y) and, for the first time, matched securities revenue. Both securities and derivatives revenue now account for 32% of the group’s total revenue respectively.

Expenses broadly under control (+5% y-o-y; -3% q-o-q). Management continued to guide for FY14 operating expenses of between SGD320m-330m (FY13: SGD300m), while technology-related capital expenditure is expected to come in between SGD35m-40m.

Dividend. As expected, SGX declared an interim DPS of 4 cents (2QFY13: 4 cents).

Forecasts. We trim our FY14F-15F ADT projections by 7% annually, leading to a 4-5% reductions in our FY14F-15F net profit projections.

Valuation and recommendation. We lower our FV to SGD7.80 from SGD8.10, based on an unchanged target CY14 P/E of 23x (10% discount to average P/E of 25x). NEUTRAL call maintained.