SINGAPORE (Aug 7): On the back of its booming derivatives business, Singapore Exchange (SGX) posted its highest full-year net profit in 11 years.

For the FY19 ended June, SGX saw its earnings rise 8% year-on-year to a record $391 million, in tandem with a 8% rise in revenue to $909.8 million – the highest since its listing.

The stellar results came on the back of robust derivatives volume, as traded volume grew 21% to 240 million contracts to offset a 15% decline in equity traded value.

See: SGX posts highest full-year earnings in 11 years of $391 mil

Shares in SGX closed at $7.90 on Aug 6, just 1.9% off its 52-week peak of $8.05 in late July.

“We believe SGX will continue to benefit from strong demand for risk management instruments amid the uncertain market environment. It has delivered record derivatives performance in the last few quarters, offsetting the slower equities business,” says DBS Group Research analyst Lim Rui Wen.

DBS is upgrading SGX to “buy” from “hold”, and raising its target price to $8.30 from $7.05 previously.

“We believe [SGX’s] share price should continue to be well-supported by its absolute dividend of 30 cents a year, implying close to 3.8% yield at current level,” Lim adds.

However, Lim warns that SGX may see potential earnings downside as a result of competition from HKEX, which announced earlier this year that it intends to launch futures contracts. “These may compete with SGX’s FTSE China A50 Index Futures, which accounts for close to 40% of SGX’s total derivatives volume,” she says.

Meanwhile, both RHB Group Research and CGS-CIMB Research are downgrading their recommendations for SGX. The analysts believe that the positives have already been priced in, and that the bourse offers limited upside ahead.

“Given SGX’s 12% year-to-date share price growth, we believe the positives – particularly for the derivatives business – are largely priced in,” says RHB’s Leng Seng Choon.

However, Leng agree that market volatility will continue to keep SGX’s derivatives volume firm.

“We have conservatively assumed flat FY20F derivatives average daily contract (DADC) on expectations of slower China A50 Index Futures trading, with the Hong Kong Exchange’s expected launch of the MSCI China A Index Futures,” he adds.

RHB is downgrading SGX to “neutral” from “buy”, but keeping its target price unchanged at $8.10.

“Given the relatively higher base of derivatives volume of 240 million in FY19, we think FY20F could face a tougher year in repeating a strong double-digit growth rate, especially with potential competition from HKEX for China A50 and uncertainty relating to Nifty licensing,” says CGS-CIMB’s Ngoh Yi Sin.

CGS-CIMB is downgrading SGX to “hold” from “add”, but raising its target price to $8.10 from $7.90 previously.

“Given the reliance risks on major derivatives products and inherent weakness in securities, we think SGX should trade at 0.5 standard deviation below its historical mean of 23.2 times, with its close to 4% dividend yield as share price support,” says Ngoh.

However, the analyst says she sees “little upside potential” at the target price, adding that she will revisit the counter at a lower price level.

As at 4.25pm, shares in SGX are trading 10 cents higher, or up 1.3%, at $8.00.