What Investors Need to Know About Singapore Exchange Limited’s Latest Earnings

Singapore Exchange Limited (SGX: S68) – or more popularly known as SGX – reported its earnings yesterday (note: 21 January 2015) for the second quarter of the financial year that began on 1 July 2014 (FY 2015). The reporting period was for 1 October 2014 to 31 December 2014. As the only local bourse (stock exchange) in Singapore, SGX holds a monopoly position as a share market operator and derives its revenue from a variety of sources. You can learn more about the company here and here.

Financial highlights

Here’s a rundown on the financial figures:

  1. Overall revenue for SGX rose 18.9% to $195.1 million on a year on year comparison. A good part of this rise was driven by a healthy 45.6% increase in derivative trading for equities and commodities.
  2. In turn, net profit rose by 15.5% to $86.6 million. Operating expense increased by 22.5% due to higher staff cost, and processing and royalties cost.
  3. Earnings per share (EPS) followed suit with a 15.7% increase from 7 cents in the second  quarter last year to 8.1 cents in the past quarter. The share market operator made 15.3 cents in EPS for the first half of the financial year.
  4. Cashflow from operations came in at $88.7 million for the second quarter of FY 2015 with capital expenditure clocking in at $20.4 million. This gave SGX a positive free cash flow of $68.3 million.
  5. As of 31 December 2014, the group had $674.5 million in cash and equivalents and no debt.

In all, SGX experienced a nice bump in revenue and profit on year on year basis. While the securities revenue remained lackluster with a 1% decline year on year, derivatives revenue benefited from a big jump in the number of contracts for FTSE China A50 futures and iron ore products. Management proposed an interim dividend of 4 cents per share, which matched last year’s dividend payout for the same period.

Operational highlights

Despite the year on year decline in securities revenue, the total traded value for mainboard companies actually rose by 7%. With the reduction of lot size to 100 commencing this week, initial data points to further upticks in trading volume in the future. Beyond the securities and derivatives revenue, the second quarter of FY 2015 also saw a healthy 24.1% uptick in issuer services revenue. A total of 14 new listing raising $700 million in funds were completed. On the cost side, the increases in staff cost was down to sharply higher variable bonus (including CPF contribution).

On 1st October 2014, SGX acquired the remaining 51% equity interest in Energy Market Company Pte. Ltd. (EMC). Prior to this, SGX owned the other 49% of EMC. The $6 million in revenue from the new subsidiary (EMC) has been parked under derivatives revenue.

A Board Committee of Inquiry has also been appointed to review the 5 November 2014 disruption which saw a trading halt of more than two hours. Expenses related to these disruptions are estimated to be between $3 million and $4 million.

Chief Executive Officer (CEO) of SGX, Magnus Bocker rounded off the earnings call with this statement:

The outlook for the global economy remains uncertain with continued volatility. Against this backdrop, we expect the demand for Asian trading and clearing services to grow. We therefore remain committed to our long term growth strategy. We have accelerated capital investments in our Derivatives and Fixed Income businesses. These are in addition to on-going investments including a new generation post trade system for our Securities business.

To CEO Bocker’s comments, SGX plans to increase its technology-related capital expenditure to between $70 million to $75 million, up $20 million from the previous range. With operating cashflow for this quarter alone coming in at $88.7 million, the increase should be well within SGX’s comfort zone.

Foolish summary

As of the closing price on 21 January 2015 of $7.90, SGX traded at a price-to-earnings ratio of 25.6, and has a dividend yield of around 3.5%.

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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.