SGX: Equities market strength may not be sustained

Equities market strength may not be sustained

Maintain SELL on SGX. After equities market ADT rose to S$2.27b in May 09, it subsequently fell for two months before recovering to S$1.88b in Aug 09. The ADT for Jul and Aug 09 was S$1.73b, higher than our FY10 assumption of S$1.47b. However, we are maintaining our assumption as current market valuations are not cheap and investing interest may not be sustained. Our SGX target price of S$7.00 is derived from 22x of our FY10 EPS, which is close to the 22x average for the past four years.

Value per share traded is sharply lower than historical average, suggesting dominance of penny stocks trading. For the two months of Jul and Aug 09, value per share traded was S$0.79, sharply lower than FY08 and FY09’s S$1.08 and S$0.94 respectively. This suggests that trading activity is more concentrated in the penny stocks. Historically, the penny stocks were the last to move in an upmarket. We are not optimistic that equities market trading volume will stay high in the months ahead.

Our analysis shows that SGX target price would be S$8.00 if FY10 ADT hits S$1.84b, or S$9.10 if ADT is S$2.20b. Investors who are more optimistic on the market trading volumes can trade on SGX. But we are not so optimistic.

SGX’s earnings is less sensitive (than BMB) to ADT changes. Equities trading accounts for a third of SGX’s operating revenue, lower than Bursa Malaysia Berhad (BMB)’s 47%. A 25% rise in SGX ADT (above base case) will raise SGX FY10 net profit by 15%, whilst BMB’s FY10 net profit could rise by a stronger 21% for a similar percentage change in ADT. This is not a positive for SGX as we are forecasting FY10 ADT to be stronger than the FY09 level.

Dividend yield is also unexciting. SGX is committed to an annual base dividend of 14S¢/share. We are forecasting FY10 dividend of 28.9S¢/share, based on a 90% payout ratio (FY09 payout ratio was 90%). This gives an unexciting dividend yield of 3.4%.





Leng Seng Choon, CFA