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What Made Singapore Exchange Limited Record Lower Profits for the Year?

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Despite recording higher revenues in most of its business segments for the financial year ended 30 June 2014 (FY2014), Singapore Exchange Limited (SGX: S68) saw total revenue dip 4% from a year ago to S$686.9 million. The company had reported its full-year earnings just yesterday.

Singapore Exchange, which is well-known as Singapore’s stock exchange operator, actually has five main lines of business: Securities; Derivatives; Market Data and Connectivity; Depository Services; and Issuer Services.

Securities revenue decreased by 17.5% to S$226.9 million for the year mainly due to declines in the securities daily average traded value (Singapore Exchange calls this SDAV) and total traded value to S$1.14 billion and S$286.3 billion, respectively. For FY2014, Securities brought in 33% (S$226.9 million) of the company’s total revenue.

Derivatives, which was the second largest revenue contributor at 30% of total revenue, saw its revenue go up by 3% to S$208.7 million. This was largely on the back of a 3% increase in total derivatives volumes to 104.3 million contracts.

Elsewhere, Market Data and Connectivity, Depository Services, and Issuer Services saw their top-lines grow by 4%, 0%, and 15% respectively. These three business segments ended FY2014 with revenue of S$76.6 million, S$95 million, and S$78.3 million.

Partly as a result of the double-digit decline in Securities, Singapore Exchange’s net profit dropped 4.6% to S$320.4 million. Consequently, the company’s basic earnings per share for the year had declined by 4.5% as well to S$0.30.

Of course, it’s not all just dreary news at Singapore Exchange. Despite its lower top- and bottom-line, the firm still ended FY2014 with a strong balance sheet. As of 30 June 2014, it had S$756.9 million in cash in its coffers, a negligible dip from S$763 million seen a year ago. It didn’t have any debt to speak off for both years.

For Singapore Exchange’s FY2014, a total of 34 new listings made its debut, raising $4.8 billion in total. This compares against 30 listings in FY2013 that raised S$8.1 billion. Two such new listings in FY2014 include Frasers Hospitality Trust (SGX: ACV) and OUE Commercial REIT (SGX: TS0U). As of 30 June 2014, the total market capitalisation of all the shares listed here expanded by 6% to hit the S$1 trillion mark.

Notwithstanding the dismal showing for the year, SGX will be rewarding its shareholders with a final dividend of S$0.16 per share, bringing the total dividend for the year to S$0.28 per share. This is unchanged from the previous year.

In Singapore Exchange’s earnings release, its Chief Executive Officer Magnus Bocker, commented on the improvements the company has made to the financial markets in Singapore, highlighted the newly-launched products that could help grow the business, and expressed his confidence in the company’s future. The following’s straight from the horse’s mouth:

“It was a year during which we accelerated the transformation of our securities market to improve governance and liquidity. In February, we implemented dynamic circuit breakers as an additional market safeguard, and issued a joint consultation paper with the Monetary Authority of Singapore setting out a number of proposals to further enhance our market. We introduced new order types in March to improve trade execution. In June, we opened up to market makers and liquidity providers, and launched a new pricing scheme.

In our derivatives business, we saw overall volumes grow 3% to a record 104 million contracts. Apart from the Nikkei 225 futures which normalised from a record year, volume growth was 19%. Our suite of iron ore products had a stellar year, growing 234% to 1.2 million contracts. During the year, we introduced more Asian equity index futures, and launched foreign exchange futures and the clearing of non-deliverable interest rate swaps. In the next few quarters, we will launch electricity and gold futures, and expand our suite of FX futures.

We are confident that our securities market will recover despite a tough year. We remain committed to our strategy to grow all our businesses.”

Reaction to Singapore Exchange’s earnings seemed muted with its shares flat at the time of writing (9:12am, 1 August 2014). At its current price of S$7.06, that translates to a trailing Price/Earnings ratio of 24 and a historical dividend yield of 4%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.