Whats up with SGX's 27% share price slump in April?

Life after the failed merger. Since the announcement of its then proposed merger with ASX Limited in Oct 2011, Singapore Exchange's stock price has been badly hurt by market's perception of a higher-than-expected premium for the merger with ASX. Although the share price did recover modestly following the failure of the deal in April 2011, it is currently languishing at around the S$7.50 level (versus the 52-week high of S$10.26 in Oct 2010).

Open to other possibilities. Meanwhile, the exchange head honcho Magnus Bocker has not revealed any other tie-ups for the organisation, but appears open to any potential discussions. There were earlier talks of possible alliance with Hong Kong, but so far, there have been no other information.

Value is emerging. Potential merger aside, at current share price level, this partially reflects the present slowdown in the securities market. Trading volume has been coming off since this year's high in January. For the month of May, average trading volume is around 1.19 billion units per day worth an average traded value of S$1.47 billion. For volume, this is down 14% MoM and 26% YoY. For value, it is down 8% MoM and 18% YoY. Based on the April and May numbers, this quarter is gearing up to be at least 19% QoQ and YoY lower. However, SGX's share price has tumbled some 27% from the 4Q10 high. We believe that value is starting to emerge at current level as management is still pushing ahead with its organic growth plans, and the failed merger should not derailed its core businesses.

Reiterate BUY at current level. While the current muted tone in the market could possibly drag down market sentiment for the rest of 4Q FY11, we do not expect this trend to persist into the next financial year and expect FY12 to be a better year, projecting a 14% rise in net earnings to S$309m. Current dividend yield is also decent at about 3.0%. At current price level, and for investors repared to overlook the near term uncertainties, SGX is still a well-run, cash generative business model. Together with its recent initiatives to further widen its product offerings, including more products for its derivatives market (which saw average daily volume up 12% YoY in April 2011 to 252,401 contracts or total volume growth of 3% in Apr), it is gradually beefing up its offerings. We are reiterating our BUY rating with fair value estimate of S$8.97.