Singapore Exchange - DBS Research 2016-08-05: Acquiring The Baltic Exchange for £77.6m

Singapore Exchange - DBS Research 2016-08-05: Acquiring The Baltic Exchange for £77.6m SINGAPORE EXCHANGE LIMITED SGX S68.SI 

Singapore Exchange - Acquiring The Baltic Exchange for £77.6m

  • Purchase consideration works out to 3x book value and >50x PE.
  • Acquisition to boost SGX’s plans to diversify revenue streams from sluggish Securities market and reduce reliance on Derivatives market.
  • Maintain HOLD, TP: S$7.80.

What's New

  • Singapore Exchange (SGX) announced that it is proposing to acquire The Baltic Exchange for £77.6m (S$137m) cash. 
  • The Baltic Exchange’s shareholders could also receive at least £18.80 per share in cash as a final dividend, subject to approval and on the condition that SGX’s proposed offer becomes effective. This would boost The Baltic Exchange’s total valuation to about £86.7m.

Our view

  • The purchase consideration works out to about 3x book value of £25.95m for The Baltic Exchange as at Mar15, vs 7.7x P/BV for FY Jun 17 for SGX. On a PE basis, it seems rather expensive as it works out to > 50x FY 15 earnings, as compared to SGX’s 23x FY16 and 21x FY17F earnings. 
  • Intercontinental Exchange (ICE US Equity), which operates global commodity and financial products marketplaces, for example, trades at 20x FY16 consensus earnings and FY15 P/BV of 2.2x. 
  • Contribution to SGX is minimal, as The Baltic Exchange reported a net profit of £1.34m on revenue of £6.03m for FY Mar 15, vs SGX’s net profit of S$349m for FY Jun16. SGX has cash of about S$866.3m as at 30 Jun 16.
  • Founded in 1744, the privately-owned Baltic Exchange owns benchmark indexes for global shipping rates and provides a trading platform for the freight derivatives market. A purchase by SGX would boost its plans to diversify revenue streams from the sluggish Securities market and to reduce reliance on the Derivatives market. SGX is also looking to expand its global presence in shipping and has been developing Asian pricing benchmarks for commodities such as iron ore, liquefied natural gas and coking coal.
  • SGX had submitted a non-binding bid for the acquisition of The Baltic Exchange back in February this year. A successful acquisition would enhance SGX's products and services, including futures trading and thus help to boost earnings going forward.
  • We currently have a HOLD recommendation on SGX with target price of S$7.80.

LING Lee Keng DBS Vickers | Sue Lin Lim DBS Vickers | http://www.dbsvickers.com/ 2016-08-05
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 7.80 Same 7.80