On 19 October 2016, SGX reported 1QFY2017 results. Notwithstanding the net profit amounted to $83 million, the overall performance was poor. This is not surprising given that the bourse operator is a proxy to Singapore economy, which has been sluggish for the whole of this year.
Key financial indicators
Revenue: $191 million, down 13% from a year earlier
Operating profit: $97 million, down 17%
Net profit: $83 million, down 16%
Earnings per share: 7.8 cents, down 16%
Interim dividend per share: 5 cents, unchanged
Revenue had been dragged by declines seen in the Equities and Fixed Income and Derivatives segments, both recording a drop of 9% and 22% respectively compared to 2016. The slowing global economic growth and the political uncertainties arising from Brexit resulted in lower trading volumes.
Strength of SGX
However, investors should not judge SGX’s strength on the basis of one quarter’s financial performance alone. The group’s balance sheet is actually very strong – no borrowings and cash-rich. In fact, its current asset amounted to $1.53 billion and total liabilities stood at only $951 million.
Expenses decreased 8% to $93.7 million ($102.3 million), as all expense items declined year-on-year. Total staff costs decreased $2.4 million or 6% to $39.6 million ($42.0 million). Technology expenses decreased $1.1 million or 4% to $29.4 million ($30.5 million), due mainly to a 21% decline in depreciation to $10.4 million ($13.1 million).
While reining in expenses may reflect management’s discipline in managing resources, my concern is that human resources and technology are critical investments. Investments in these two functions should not be drastically curbed to the extent of impacting growth.
The Net Current Asset Value Per Share( NCAVPS) stood at $0.55 per share while Net Asset Value (NAV) was $0.82. At the current price of $7.16, SGX’s share price seems inflated.
Operating cash flow remained healthy for the past 4 years, averaging about $407 million. Barring FY2014, total revenue increased over the years, with FY2016 clocking $818 million.
But of more eye-catching indicator is its strong Return-on-Equity (ROE), which was a minimum of 35% for the past 4 years. This data suggests that SGX may be a growth stock. The thing about growth stocks is that their prices are sensitive to revenue performance. This can be seen in SGX’s share price, which hovered around $6 to $7 range for the past four years, mirroring its stagnant revenue performances.
On another note, during bull market, growth stocks tend to perform well. This can be seen in SGX’s share price, which surged to record high of $15.90 during the heady 2007.
My strategy for SGX
I am not vested in this counter but like its growth story. With so much cash on hand, SGX can afford to take on more risks in acquiring more companies in order to keep growing. It’s recent acquisition of Baltic Exchange is a good development. Nonetheless, with many investors staying on the sideline due to retrenchments, trading volume is expected to slide in the coming months.
Thus, I see any major correction in SGX’s share price as good opportunity to enter. My target entry price is $2.00.
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SG Wealth Builder