Investor Central: Singapore Exchange Limited — How much do the improved regulatory and risk management capabilities cost?

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KUALA LUMPUR, Aug 23 — Singapore Exchange Ltd warns costs are going to rise substantially in the year ahead.

It says it expects operating expenses of between S$330 million (RM835 million) and S$340 million, up from S$315 million in the year just ended.

This 5 per cent increase would be the same as it registered in the previous financial year.

SGX also plans to spend between S$50 million and S$55 million on investments in technology, which would be up at least 15 per cent on the S$43.4 million in the year under review.

That itself was 36.5 per cent more than in the previous year.

The company that operates the Singapore stock market has launched new products, services and distribution channels, which it hopes will drive earnings.

The company just announced earnings for FY14:

Revenue: -4.0 per cent per cent to S$686.9 million

Profit: -4.6 per cent per cent to S$320.4 million

One-off gains/losses: S$4.9 million vs S$9.8 million

Cash flow from operations: S$358.6 million vs S$418.9 million

Dividend: 28 cents per share vs 28 cents per share

On the top line, the securities business was the only one to register declines.

It fell 18 per cent to S$226.9 million, and now makes up only one-third of total revenues.

Average daily volume (SDAV) dropped around 23 per cent to S$1.14 billion, down from S$1.48 billion.

The reason was that retail investors avoided penny stocks after the October 4, 2013, crash in Blumont, Innopac, LionGold and others.

SDAV had held up at S$1.33 billion during Q1, but dropped to around S$1.07 billion for the remaining three quarters of the financial year.

SGX says it expects the securities market to recover in the year ahead, after what it acknowledged was a tough FY14.

Turnover velocity, which measures the health of the market, slumped by a quarter to 39 per cent from 52 per cent.

Volatility is expected to normalise, after the low volatility of the past three quarters.

Derivatives revenue now makes up 30 per cent of revenue – almost as much as securities – rising 3 per cent to S$208.7 million.

The China A50, India Nifty and Iron Ore contracts all achieved record volumes, rising double digits.

Market data sales was up 4 per cent and connectivity was up 3 per cent, but together made up only about 11 per cent of FY14 revenues.

Investor Central. We keep your investments honest.

1. How much do the “improved regulatory and risk management capabilities” cost?

On page 4 of the financial statements, SGX mentions that expenses increased 5 per cent to S$315.2 million, partly for “improved regulatory and risk management capabilities”.

Undoubtedly, this is an important area to be investing in.

The negative effects of the October 4 penny stock crash are well acknowledged by the exchange itself.

It impacted turnover velocity, therefore brought down SDAV, and partly led to the decline in group revenue.

Now, on November 22, SGX announced that it had promoted Richard Teng into the Chief Regulatory Officer role, effective January 1, 2014. He had deputised in that role since January 1, 2012.

Also at the beginning of 2014, Agnes Siew-Koh became the Chief Risk Officer.

Together with the FY14 financial statements, SGX also announced major changes to the way the market operates, such as reducing board lot sizes, implementing a minimum S$0.20 a share price for Mainboard listed companies, and others, starting January 1.

But for shareholders of the Singapore Exchange Ltd, the question remains: On what is it spending the money to avoid a repeat of the October 4 crash?

What additional capabilities has it brought on board to avoid a repeat, and how much are these new resources costing?

2. What technology will SGX invest in?

Technology investment costs just keep rising.

Having already risen 36.5 per cent over FY13, they are now expected to grow 15 per cent in the year ahead.

What will SGX be investing in?

3. What is the one off-item that the company is referring to in its premises expense?

SGX mentions that its premises expense has increased 15 per cent to S$20.4 million which includes one off-items relating to their office relocation.

However, they do not mention what the one off-item is. So, what is it?

This is particularly curious when the rental, maintenance and depreciation charges already add up to S$20.4 million.

4. How much will the new location in Buona Vista save?

SGX says it relocated the majority of support and regulatory personnel to new premises in Buona Vista, which ultimately results in “lower rental rates”.

What do the cost savings amount to, considering that some staff will incur extra transport costs from shuttling between Buona Vista and the existing office in SGX Centre?

5. What makes SGX confident of a pick-up in volumes and volatility?

The SGX said in its earnings commentary that volatility would “normalise”.

First, what makes it so sure that it will?

Second, what is the definition of “normal” volatility?

6. What are the targets for their new Hong Kong branch?

On July 8, SGX announced that it was opening a branch in Hong Kong, particularly focused on derivatives.

To this end, they also opened the doors to their data centre there, to allow Hong Kong market participants to get closer to the SGX’s trading engine.

7. What is the India Liaison Office for?

On July 22, SGX announced that it had opened a Liaison Office in Mumbai.

SGX has had a 5 per cent stake in the Bombay Stock Exchange since 2007, and it says there are five Indian companies listed on the SGX.

But this statement in the release leaves open whether the aim is to bring Singapore companies to India, or Indian companies to Singapore: “As a stakeholder in BSE, we will support the exchange by bringing efficiency with new initiatives and IPOs”.

It would be great to get some clarification on this.

8. Why did SGX slip in the GTI ranking?

SGX has slipped to fourth place, from first last year, in the Governance & Transparency Index (GTI) compiled by the Business Times and the NUS Business School.

Keppel Corp is now in first place, followed by Singapore Telecom and SembCorp Industries.

It’s peculiar that the operator of the market, whose job it is in part to uphold corporate governance standards, doesn’t itself dominate top spot.

What happened?!

9. What’s happening with the ASEAN trade link?

It’s been a long time since we heard any update about the much awaited ASEAN trade link.

What’s happening on that front?

Are regional exchanges worried about the surveillance and governance challenges after the October 4 crash on SGX and a more recent penny stock crash on Bursa Malaysia?

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.

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