Singapore Exchange - CEO scorecard
- This Jul marks two years since CEO Loh Boon Chye took the helm at SGX. We take this opportunity to review the initiatives he has implemented.
- We see improved market liquidity, better retail participation, healthier pipeline of IPOs, better cost management and a more targeted business focus.
- Larger M&As could be on the cards. Acquiring a market data or index business could provide the next leg up for earnings amid unpredictable stock market volumes.
- Upgrade to Add. We raise FY18-19 EPS forecasts by 2% for higher securities ADVT.
- Our target price rises to S$8.09, based on 24x FY18 P/E (previously DDM).
Leaner, meaner machine
- The most tangible changes implemented by the CEO were cost efficiency measures. A group restructuring, paced out hiring, cutback on discretionary spending and better external vendor management led to impressive cost reduction (-4% yoy in 1HFY17) despite ongoing investments in technology.
- For FY17, SGX lowered its cost guidance to S$405m-415m (-1% to +1% yoy), from S$420m-430m previously (+3% to +5% yoy).
Improving access to retail participants
- The main grouse retail investors had previously was lack of retail access and participation, and that SGX was focusing too much on the derivatives market. Starting May 2017, SGX will stipulate a minimum 5% allocation of IPO offer size to retail investors, or S$50m, whichever is lower.
- The market maker and liquidity provider programme has also helped to boost liquidity, which benefits retail investors.
More IPOs, more liquidity
- SGX’s sectorial approach to attracting listings has been paying off, with a healthy pipeline of new listings in 2017 expected to come from the consumer, real estate, infrastructure and technology sectors that SGX has worked hard to build a niche in. In 8MFY17, SGX clinched 11 new IPOs, more than double the five new listings in FY16.
- SGX is also considering allowing for dual class shares, which could attract listings from technology firms that would otherwise have gone to competing exchanges.
Putting the eggs in multiple baskets
- While derivatives contracts such as the China A50 and iron ore futures have seen strong trading volumes, it has also built concentration risk with derivatives accounting for 40% of revenue in FY16.
- A focus on growing market data revenue streams with the introduction of SGX Index Edge will help to ease some of this risk.
- The launch of the OTC bond trading platform, SGX Bond Pro, provides another diversified income stream, though contributions are still limited at this stage.
Larger M&As could be on the cards
- With a war chest of S$395m and room to gear up/raise funds, we think SGX could look for large M&As. Areas of consideration include: 1) fixed income, 2) foreign exchange, 3) market data and 4) indices.
- We think acquisitions in the latter two categories would provide more meaningful earnings uplift and diversification. Among the leading index businesses, only the MSCI is not currently owned by an exchange or recently acquired.
Upgrade from Hold to Add
- We raise FY18-19F EPS by 2% for higher securities ADVT of S$1.2bn (prev. S$1.1bn) given the recent pickup in trading activity.
- We switch to a P/E multiple of 24x (historical mean) instead of DDM which better reflects growth opportunities and potential changes in capital structure.
- We upgrade SGX to Add, with a higher TP of S$8.09.
- Downside risk may stem from the market returning to a risk-off mode amid political uncertainty.