Singapore Exchange Limited’s Latest Earnings: What’s Next After A Strong Showing?

Singapore Exchange Limited (SGX: S68), Singapore’s stock exchange operator and regulator, reported its fiscal third-quarter results yesterday evening.

The company’s operations can be split into five main business divisions: Securities; Derivatives; Market Data and Connectivity; Depository Services; and Issuer Services. If you’re interested to know more about how Singapore Exchange earns its keep, you can jump in here.

With that, let’s get right into it.

Some basic financial highlights

For the fiscal third-quarter (three months ended 31 March 2015), Singapore Exchange experienced a 20% surge in total revenue to S$199 million when pitted against the same period a year ago.

This was achieved on the back of a broad-based growth throughout the five business divisions (see table below) and the complete acquisition of Energy Market Company Pte Ltd, a firm which operates the Singapore Electricity Spot Market; Energy Market Company had added S$5.8 million to Singapore Exchange’s top-line in the reporting quarter.

Singapore Exchange's revenue (31 March 2015)

Source: Singapore Exchange’s earnings release

Singapore Exchange’s top-line growth had added some substantial meat to its bottom-line; net profit for the quarter had jumped by 16% to S$88 million.

Despite the higher profit, Singapore Exchange has decided to keep its interim dividend for the quarter at 4.0 Singapore cents per share, unchanged from the same period a year ago.

With that, let’s take a closer look at the performance of the company’s individual segments.

A close-up look and operational highlights

The Securities business only managed to enjoy a very slight bump-up in revenue as the “total traded value was offset by a drop in average clearing fee.” Singapore Exchange saw its securities daily average traded value (SFAV) and total traded value increase on a year-on-year basis by 8% and 6% to S$1.17 billion and S$71.4 billion respectively; the average clearing fee stepped down by 5% from “3.1 basis points a year earlier under the previous pricing model.”

As we can see in the table above, the Derivatives division had enjoyed a great quarter with its revenue spiking 52.4%. Its growth was underpinned by increased volumes in the index futures and commodity products. In particular, volumes for the FTSE China A50 futures soared 165% to 17.9 million contracts compared to a year ago. Within the commodity products space, Iron Ore was a standout as its volumes skyrocketed by 280% to 1.4 million contracts for the quarter.

Meanwhile, Market Data and Connectivity revenue grew partly due to “a strong quarter of index sales, and revenue growth from usage of market data for trading, risk management and back office applications.” A higher number of connections to Singapore Exchange’s Securities and Derivatives market, and a 15% year-on-year increase in average colocation racks, had also helped add to the division’s top-line.

Moving on, Depository Services saw its revenue advance by 13.9% mainly due to higher revised fees and increased volumes of securities settlement instructions.

Last but not least, we have Issuer Services, which saw a small 3% uptick in revenue in the quarter. Issuer Services can be further broken down into Listing revenue (down 4% to S$12.6 million) and Corporate actions and other revenue (up 16% to S$7.6 million).

The former had slipped by 4% as “there were two new listings in the quarter which raised S$25 million, compared to the six new listing raising S$433 million a year earlier.” In addition, the 111 new bond listings in the quarter only managed to raise S$46.5 billion; this compares against the 117 listings a year earlier which raised S$49.7 billion.

Magnus Bocker, chief executive of Singapore Exchange, had given the following comments in the earnings release on the company’s operational highlights for the quarter:

“The on-going transformation of our Securities market is tracking well, and this quarter builds on the success of the initiatives introduced thus far. A good example is the reduction of the board-lot size, which has contributed to retail participation in high-priced stocks outpacing retail participation in the overall market this quarter.

The board lot size reduction also achieved improved trade execution and efficiency of portfolio management for institutional investors and professional traders. During the same period, 54% of all orders placed were in sizes of 1000 units and below.

We are pleased with our derivatives results this quarter, which reflects the sustainable growth of our derivatives business. Our portfolio of derivatives products across Asian equity index futures and key commodities futures, as well as our clearing capabilities demonstrate the success of SGX and Singapore as a risk management centre.”

Financial position & outlook

As of 31 March 2015, Singapore Exchange has a rock-solid balance sheet with S$714 million in cash and zero debt. This is more or less unchanged compared to a year ago when the company had cash on hand of S$728 million and zero borrowings.

The company also brought in S$102.5 million in operating cash flow for the quarter. With S$21.5 million in capital expenditures, this gives Singapore Exchange some S$81 million in free cash flow. The selfsame figures for the same period a year ago were S$91.8 million (operating cash flow), S$24.9 million (capital expenditures), and S$67 million (free cash flow), respectively.

Here are some comments from Bocker, found in the earnings release, on what he thinks the future will be like for Singapore Exchange:

“As with last quarter, we continue to expect demand for Asian trading and clearing services, as well as competition to grow. The roll-out of the improvements to transform our Securities market includes plans for a new-generation post trade system and will position us well for the future. In addition, our accelerated platform investments in our Derivatives and Fixed Income businesses remain key pillars to our overall growth strategy.”

It’s worth noting that Bocker will be stepping down from his post as chief executive of Singapore Exchange at end-June this year; this had been announced back in early March. No details on the leadership transitioned were given in the earnings release by Singapore Exchange, but suffice it to say that it will be an important development for investors to keep track of.

Based on Singapore Exchange’s last closing price of S$8.52 per share yesterday, the stock exchange operator has a trailing price-to-earnings ratio of 28 and a historical dividend yield of 3.3%.

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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 James Yeo doesn’t own shares in any companies mentioned.