SINGAPORE EXCHANGE (SGX) | BUY (MAINTAINED)
MARCH 13 CLOSE: $7.26
PRICE TARGET: $8.20
Jefferies Singapore, March 12
While we acknowledge that the increased weighting of China in MSCI EM indices is a key development and the expected launch of MSCI China A Index futures is a credible threat, we are not overly concerned.
SGX has faced such competition time and again. There were concerns about China A50 futures when CES China 120 futures was launched in 2013.
Iron ore contracts were under threat when CME launched competing products in 2014. More recently, there were concerns about SGX Nifty futures. That said, derivative revenue has grown annually by 11 per cent since 2013 and annual volume has nearly doubled in the period.
First mover advantage, complementary product suite, cross-margining facility, access to interdealer markets using US dollar-denominated products and growing currency futures are a few strengths that SGX can draw upon.
In our view, it is too early to infer impact on earnings. Last year, SGX similarly fell 7.3 per cent on the back of Nifty news flow. However, it did not impact earnings or dividend.
We continue to believe SGX has multiple uncorrelated revenue streams with near monopoly position in clearing. Valuation is comparable or cheaper than Asian peers.
CEI | HOLD (NO CHANGE)
MARCH 13 CLOSE: $0.97
TARGET PRICE: $0.97
CGS-CIMB, March 12
CEI reported FY2018 results on Feb 22. Despite the low year-on-year sales growth of 2.6 per cent, CEI did well in cost management, which resulted in 7.2 per cent year-on-year net profit growth.
Given that CEI has factories in Indonesia and Vietnam, US-China trade tensions have resulted in more requests for quotations from companies looking for alternative manufacturers to support their needs.
We understand that utilisation rates in Vietnam could be less than 50 per cent while those in Indonesia could be less than 70 per cent, allowing CEI to take on additional orders.
However, seeing that CEI's cost structure is not set up for high volume production, we believe CEI will be selective in adding new customers or taking on new projects.
As CEI is not exposed to price sensitive consumer discretionary products and has a diverse range of customers, we believe the outlook for FY2019 is stable. CEI's order book as at end December 2018 was $63.6 million and we expect this order book to generate revenues within FY2019.
Given limited capex needs, we believe that CEI will continue with its almost 100 per cent dividend payout trend.
Key risks are foreign exchange losses and a pullback in customer orders. Meanwhile, earnings upside could come from new customers/projects due to the trade tensions.
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