SGX remains a good proxy for the rebound in capital market conditions, in our view, and although the share price has performed well in recent months we see scope for further upside. We raise EPS estimates by 8-9% on higher trading income and, in our view, revision risks are still skewed to the upside, particularly from IPOs and derivatives should the economic recovery continue. Buy, TP raised to $9.50/share.

SGX FY09 NPAT of $306m was well ahead of our $281m forecast and 3% above consensus $298m while the 15.5cps final DPS compared to our 13.3cps. Though the result is well down on FY08, given the recent recovery in capital markets the outlook is much improved. Revenues rebounded strongly in 4Q09 to be broadly in line with pcp, an excellent outcome given the turmoil in equity markets over the past twelve months. To reflect improved market conditions we upgrade EPS by 8- 9%. Key driver of revisions is cash market turnover which rose 84% QoQ in 4Q09, with average market cap. +32% QoQ and capital velocity at 88%.

Although derivatives volumes grew 18% QoQ in the June quarter, with open interest largely unchanged for the third quarter in a row at half the 2007 peak we think there is still some way to go before the derivative market properly recovers. IPO’s were non-existent in the June quarter, clearly well down from peak levels which equated to roughly 175bps of total market capitalization. As the economic recovery takes hold we see scope for further improvement in both derivatives and IPOs which we believe should support further medium term earnings upside.

We use a COE of 9.3%, ‘g’ of 4.8% and dividend payout ratio of 90-91% in our three-stage 10-year DDM, which gives a 12-month TP of SGD9.50. We have increased our long term growth rate forecast from 3.6% to 4.8% to better reflect our view of the company’s earnings prospects which are robust, in our view, given operating leverage and relatively high barriers to entry. Key downside risks are a longer-than-expected global/regional economic slowdown and volatility in transaction turnover. See pp5-6 for more details of valuation and risks.