Singapore Exchange Ltd (SGX SP) - Maybank Kim Eng 2018-02-07: Another Positive Catalyst

Singapore Exchange Ltd (SGX SP) - Maybank Kim Eng 2018-02-07: Another Positive Catalyst SINGAPORE EXCHANGE LIMITED S68.SI BURSA MALAYSIA SINGAPORE EXCHANGE BURSA MALAYSIA LINK

Singapore Exchange Ltd (SGX SP) - Another Positive Catalyst


A BM-SGX trading link by end 2018 

  • SGX announced that it will be collaborating with Bursa Malaysia (BM) to jointly develop a BM-SGX stock market trading link by end 2018. This link will enable investors to trade and settle the shares listed on both markets more efficiently, and widen their access to the two exchanges.
  • MAS and Securities Commission Malaysia (SC) will be working on the regulatory requirements (link). There is a possibility that this cross=border initiative may be extended to connect other ASEAN exchanges.
  • Pending further updates, we maintain our Target Price of SGD8.82, based on an unchanged P/E of 23x FY19E EPS, in line with its mean since 2012.



A positive development 

  • Despite SGX’s initiatives to improve retail participation, the SDAV (securities daily average traded value) contribution from retail investors has not been able to see a meaningful uplift. Currently, both SGX’s and BM’s market cap and turnover velocity have been lagging regional peers. 
  • We think establishing the BM-SGX trading link is a positive development that will help to boost participation and liquidity on the two exchanges. With higher traded value from more liquidity, turnover velocity could improve.


May see upside risks 

  • We currently estimate FY18E/ 19E/ 20E SDAV of SGD1.22b/ SGD1.27b/ SGD1.25b. The trading link may pose further upside risks to our SDAV forecasts. 
  • Our sensitivity analysis shows that for every 10% increase in SDAV, securities clearing revenue will rise by 8-10%, ceteris paribus. That said, technology costs may increase to support new systems and platforms. 
  • We estimate costs to increase at a 3-year CAGR of ~5% on higher staff and technology costs.


Maintain BUY 

  • We maintain our forecasts and Target Price unchanged pending further details.
  • SGX has decent ROEs of ~35% and yields of ~4% in FY18-19E.
  • Risks to our call: lower SDAV/DDAV, significant regulatory changes/potential disruptors, competition and capital raising.



Swing Factors


Upside

  • Stronger-than-expected SDAV and derivatives daily average volume (DDAV).
  • Sizeable acquisitions or partnerships that can offer complementary or new product offerings to lift revenue.

Downside

  • Inability to price up due to competition from other exchanges and new entrants.
  • Capital-raising efforts to make large acquisitions could dilute ROEs.




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-07
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 8.820 Same 8.820



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