For Investors: A Quick Overview Of The Cost Structure Of Singapore Exchange Limited

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Singapore Exchange Limited (SGX: S68) is the only stock exchange operator in Singapore. But it does more than just run the local bourse – the company has three business lines, namely, Equities & Fixed Income, Derivatives, and Market Data & Connectivity.

In this article, I want to have a look at Singapore Exchange’s cost structure. Here’s a table showing parts of the company’s income statement for its fiscal years ended 30 June 2016 (FY2016) and 30 June 2015 (FY2015):

Source: Singapore Exchange FY2016 annual report

There are a few observations we can draw:

1. Staff cost is the largest expense category for Singapore Exchange, making up 39% of total operating expenses in FY2016. About 69% of the staff costs are fixed in nature while the rest is variable (such as bonuses).

2. Singapore Exchange relies heavily on technology to run its business. This is evident by the high percentage of total operating expenses (31%) contributed by the Technology cost category. This cost is largely related to things such as system maintenance and rental (around S$71.8 million), and depreciation of hardware and amortisation of software (S$51.9 million).

3. Total depreciation and amortisation charges for Singapore Exchange (this includes the technology-related depreciation and amortisation) came in at S$59.9 million, which is around 15% of total operating expenses. This cost is non-cash in nature and thus has no impact on the cash flow of Singapore Exchange despite impacting the profit number.

4. The majority of Singapore Exchange’s costs are fixed in nature. Though there’s no exact breakdown, I estimate that at least 70% of its total operating expenses in FY2016 are fixed in nature. This includes the portion of staff costs that are fixed, most of the technology costs, professional fees, and more. Given the high level of fixed costs, it is imperative that Singapore Exchange enjoy high demand-volume for its services and products to maintain its profitability.

There are a number of moving parts with Singapore Exchange’s business. By understanding the company’s cost structure, investors can gain a clearer perspective on its future profitability. This will allow investors to form a better opinion on the attractiveness of Singapore Exchange as a long-term investment.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.