SGX strategy in question as Q3 profit hits lowest in 2 years

Singapore Exchange (SGXL.SI) posted its lowest quarterly profit in two years, hurt by costs related to a failed takeover bid for Australian rival ASX (ASX.AX) and putting the spotlight on SGX CEO Magnus Bocker’s growth strategy.

SGX’s US$8 billion ($10 billion) bid for ASX was rejected by the Australian government earlier this month on national interest grounds.

Analysts say the challenges facing SGX, Asia’s second-largest listed bourse by market value, are now two-fold.

 

Securities turnover which accounted for 44% of operating revenue is stagnant and Singapore is struggling against Hong Kong to lure mega listings from global and Chinese companies.

 

“The near-term trend in terms of securities turnover means that the stock is going to struggle because of the revenue pressure,” said CLSA analyst Derek Ovington, who has an “underperform” rating on SGX.

 

“I think until we do see an improvement in (the securities turnover) or some of the other growth developments start to kick in materially, the stock will trade sideways.”

 

SGX shares fell as much 1.5% on Tuesday to a two-week low, underperforming the broader market <.FTSTI>.

 

Bocker has tried to boost trading volumes by rolling out American Depository Receipts of top Chinese companies and commodities futures.

 

Derivatives volume saw a late surge in SGX’s third quarter, driven by heightened volatility in Japanese and Indian stock market futures following the March 11 earthquake in Japan.

 

SGX posted a January-March net profit of $67.02 million, compared with $74.6 million a year ago.

 

This was below an average forecast of S$85 million by four analysts polled by Reuters and the lowest quarterly net profit since the January-March 2009 quarter, when SGX posted a net profit of US$55.3 million.

 

SGX incurred a cost of $12 million for ASX merger costs and operating expenses rose 18% from a year earlier, driven by a 40% jump in technology spending.

 

TAKEOVER TARGET?

Bocker has said in the past he will not aggressively pursue merger partners and some analysts say the bourse could itself become a takeover target for global exchanges trying to capture Asia’s growth.

 

“The real structural challenge is figuring out a way to participate in the global consolidation of the exchange industry,” said Matthew Smith, an analyst at Macquarie in Singapore. “It is hard to see how they sit if there’s going to be an acquirer.” 

 

SGX’s hefty valuation remains a big obstacle for a potential bid for the firm. It is trading at almost 29 times 2011 earnings against 17 times for ASX. Hong Kong Exchanges and Clearing (0388.HK), which acts as a gateway to China, trades at around 39 times.

 

Exchanges around the world are chasing cross-border deals to build scale and cut costs as competition increases from alternative trading platforms such as dark pools.

 

“It was a tough quarter and longer term, they are running out of tie-up options," said Christopher Wong, senior investment manager at Aberdeen Asset Management Asia, which owns SGX shares. He said that SGX could become a takeover target.

 

The listing of Hong Kong billionaire Li Ka-shing’s US$5.5 billion Hutchison ports unit last month was a big coup for Singapore, which has struggled to compete against Hong Kong and its ability to lure multi-billion dollar IPOs such as the one planned by commodities giant Glencore (GLEN.UL).

 

SGX’s securities market revenue was only slightly up from a year earlier to $73.7 million.

 

Derivatives revenue climbed about 22%, helped by volumes from options and commodities.

 

SGX shares have fallen more than 5% so far this year, underperforming bigger rival Hong Kong Exchanges and Clearing, which is up almost 1%. ASX shares are down about 13%.