(SGX SP, S$13.20, Underperform, TP: S$11.10)
Event
- We downgrade Singapore Exchange (SGX) from Outperform to Underperform, with a revised target price of S$11.10 (previously S$10.90). We believe that the sharp run-up in the share price has surpassed our fundamental view of earnings.
Impact
- Revised average daily turnover value by 2% to S$2.1bn. In the wake of the recent cut of 50bp in the US Fed funds rate, turnover value has surged to S$2.6bn per day, which we do not think is sustainable. Moreover, we think that market uncertainty could prevail, and we estimate that trading activity could remain pretty flat for the rest of the financial year. Nonetheless, we have raised our turnover value assumption by 3% to S$2.1bn for FY6/08 and reduced it by 7% to S$2.0bn for FY6/09.
- Positive view of derivatives is unchanged. We maintain our positive view that the derivatives market is ramping up existing products and launching new ones (Mini Asian Index futures contracts, single stock derivatives, Japan ETF based on TOPIX and a product suite from the revamped Straits Times Indices). Therefore, we have raised our daily volume assumption from 0.161m contracts per day to 0.164m for FY6/08.
- M&A event priced-in. We believe that the recent run-up in the share price reflects a potential M&A event. Although we cannot rule out such a possibility, we believe that any potential suitor will need to bring synergies to enhance SGX and Singapore as a financial service centre. However, at this moment, there does not appear to be one.
