Welcome to the second part of the article on Singapore Exchange Limited (SGX: S68), or more popularly known as SGX. In my previous article, I covered SGX’s revenue dynamics in the first step of my study on whether the company can support its steady dividend (more on that shortly). In here is the next step of my study where I’d look at the cash flow and balance sheet of the share market operator. As a recap: SGX has seen its share price go pretty much unchanged over the last five-plus years. The company’s shares traded at $7.10 on 30 June 2009…
Welcome to the second part of the article on Singapore Exchange Limited (SGX: S68), or more popularly known as SGX.
In my previous article, I covered SGX’s revenue dynamics in the first step of my study on whether the company can support its steady dividend (more on that shortly). In here is the next step of my study where I’d look at the cash flow and balance sheet of the share market operator.
As a recap: SGX has seen its share price go pretty much unchanged over the last five-plus years. The company’s shares traded at $7.10 on 30 June 2009 and closed yesterday with a price of $7.67. Over the same timeframe, the capital gains of the SPDR STI ETF (SGX: ES3) was 41%. The SPDR STI ETF is a proxy for the market barometer, the Straits Times Index (SGX: ^STI).
Over its past five financial years – from the financial year ended 30 June 2010 (FY2010) to FY2014 – SGX has managed to distribute a steady annual dividend totaling around $1.37 per share.
|Period||Dividend per share (Singapore cents)|
Source: Company Investor Relations Website
SGX gets its revenue from a number of different sources, namely, Securities, Derivatives, Market Data and Connectivity, Depository Services, Issuer Services, and Others.
The share market operator levies fees from the listing of securities, as well as for the clearing of securities trades and derivative contracts. The company also earns its keep by providing market data feeds for risk management and back office applications.
As the only local bourse (stock exchange) in Singapore, SGX holds a monopoly position. As of the end of December 2013, the Singapore share market had 775 companies listed, with a total market capitalization of close to S$1 trillion.
A closer look at cash flows
Source: Company’s Earnings Report
From an operating cash-flow perspective, SGX has been a picture of resilience. What’s more, its capital expenditure needs have been very low in relation to its operating cash-flow. This means that the share market operator has been generating copious amounts of positive free cash-flow to support its dividends.
In fact, the majority of SGX’s free cash-flow for the financial year ended 30 June 2014 (FY12014) had went to support its dividend for that year.
Despite the stability, it should be pointed out that SGX’s operating cash-flow has not grown much over the firm’s past five financial years. This mirrors SGX’s tepid revenue growth for the same duration.
Source: Company Earnings Report
From the graph above, we can also see that the financial standing of SGX has been a picture of health in the past five financial years. Throughout that time frame, the company has had zero debt and also saw its level of cash and equivalents inch up steadily. At the end of FY2014, the share market operator had about $757 million in cash and equivalents and no debt.
My Foolish colleague Sudhan P had pointed out that SGX has been the best performing blue chip over the decade ended 2014. It’s easy to see the positives: SGX has a monopolistic position for its business and generates rivers of positive free cash-flow. This gives the private investor the confidence that the company’s current level of dividends might be sustainable in the future.
But that was then and this is now.
For the share market operator to increase its revenue, it needs to bring in more companies to list in Singapore, improve the number of trading options available, and rely on the general increase in trading activity.
So, the open question is less about whether SGX’s business is under threat, but rather how the share market operator can expand its sales from the current level.
At SGX’s closing price yesterday, the company is traded at a trailing price to earnings ratio of about 27, and has a dividend yield of around 3.6%.
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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 Chin Hui Leong doesn’t own shares in any companies mentioned.