SGX - Earnings Surprised Analysts +S$65mn

SGX announced its 2Q12 earnings results after markets yesterday. Despite the difficult market, SGX recorded a revenue of S$148mn and a net profit of S$65.4mn. The net profit is 7% higher than consensus and 19% higher than Macquarie Equities Research (MER) forecast.

Revenues fell
Total revenues fell 14% year-on-year (YoY) as securities revenues plummeted by 34%. This was partially offset by an 11% YoY increase in derivatives revenues, which benefited from growth in collateral-related income. The total revenue figure was 3% higher than MER's forecast, which MER had intentionally set at a conservative level.

Costs led to earnings surprise
Operating expenses fell by 9% YoY and was 11% below MER's forecast. This was mainly due to reduced variable compensation and IT related expenses, although weak market activity also played a role.

Reasonably good results
On the whole, MER thinks this was a reasonably good result. Markets have been abysmal, but management’s prudent control of operating costs helped to offset this. Annualized ROE of 43% was the highest since 2Q11, when markets were far more copacetic for the exchange business.

MER continues to prefer SGX over HKEx and Bursa on balance sheet strength and valuation. A return of positive market sentiment would allow for a re-rating, and this could occur medium term with the OECD Leading Indicators showing signs of a trough. MER sees the key downside risk now as a potential London Metal Exchange (LME) acquisition.

SGX fell 2.2% yesterday, closing at $6.10.