Singapore Exchange (SGX SP) - DBS Research 2018-02-12: Addressing Concerns About Nifty

Singapore Exchange (SGX SP) - DBS Vickers 2018-02-12: Addressing Concerns About Nifty SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange (SGX SP) - Addressing Concerns About Nifty

  • Negative developments with Indian stock exchanges; Nifty 50 Index Futures, one of SGX’s key derivative products to be affected.
  • SGX expected to develop and launch new India-access risk management solutions in near term.
  • SGX's Share price could be under pressure in the near term, pending resolution of the current situation; potential c.6% downside to current Target Price if nothing is resolved.
  • Keeping our BUY rating and S$8.90 TP; stock price should still be supported by dividend yield of 4%, continued efforts to drive market liquidity, and new product initiatives.

What’s New 

Negative developments with Indian stock exchanges to affect one of SGX’s key derivative products. 

  • On 9 February, India’s three main stock exchanges – National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India (MSEI) – announced that they will stop the licensing of data for offshore derivatives linked to their domestic indices. 
  • This affects 10 other exchanges worldwide, and will particularly affect the viability of SGX's popular offering, Nifty 50 Index Futures (Nifty50), which accounted for c.12% of SGX’s total volumes in 7MFY18.

Joint press release by Indian stock exchanges issued on 9 Feb. 

  • It was stated in the joint press release by the Indian Exchanges (NSE, BSE, and MSEI) that “for various reasons, the volumes in derivative trading based on Indian securities, including indices, have reached large proportions in some of the foreign jurisdictions, resulting in migration of liquidity from India, which is not in the best interest of Indian markets”. 
  • See: Joint Press Release by the Indian Stock Exchanges dated 9 Feb.

SGX’s Reaction 

SGX’s press release on 11 Feb to address concerns. 

  • SGX announced in a press release dated 11 Feb that the market for their entire Indian suite of products including Nifty will open and operate as per normal on Monday, 12 February 2018. SGX’s license agreement with NSE will ensure the continuity of listing and trading its Nifty suite of derivative products till August 2018 at a minimum, as under NSE’s existing contract with SGX, a six-month notice period applies. 
  • Further to this, SGX will develop and launch new India-access risk management solutions to allow global participants in SGX Indian equity index family of derivative products to invest with continuity. The details will be announced in due course. 
  • See: SGX’s press release dated 11 Feb.

Conference call with analysts on 11 Feb – Key takeaways.

  • SGX is working to assure clients of continuity for the Nifty and MSCI India family of products which will be affected by this development. 
  • According to SGX, the Indian exchanges have yet to serve the notice for termination, following which, there will be a six-month notice period. SGX reiterates that there will be continued support for clients’ existing positions to ensure orderly price formation and clearing even after termination takes place. More importantly, SGX and NSE are working together to find solutions for the clients in the meantime. 
  • Going forward, SGX is expected to make an announcement on its new India-access risk management solutions in the near term.

Minimal impact on Indian SSFs and FX futures expected.

  • According to SGX, this development will affect the Nifty and MSCI family of products, but will have no impact on the Indian Single Stock Futures (SSF) launched in early February – which are new products expected to do well – as the Indian SSF products do not license market data from the Indian exchanges for the construction and pricing of Indian SSF.
  • SGX does not expect the INR/USD FX futures volumes to be impacted materially as Nifty50 is not a main driver of the INR/USD FX futures contracts.

Our View 

Nifty is one of the largest contributors of derivatives revenue. 

  • The Nifty and MSCI family of products, in totality, accounts for approximately 12% of total derivatives volumes in 1HFY18, translating to approx. 9% of SGX’s derivatives revenues (assuming S$1.20 fee per contract) and approx. 4% of SGX’s total revenues in 1H18.

Possible downside if nothing is done to remedy the situation; plans to remedy the situation are under way.

  • While there should be limited impact on earnings for the rest of FY18F, if nothing is done to remedy the current situation, potentially, there would be downside risk to earnings trajectory from FY19F. 
  • Based on our sensitivity analysis, taking out Nifty and MSCI India from SGX’s financials results in a 7% decline in its net profit from FY19F. Translating this to our valuation model would result in a 6% decline in our fair value, assuming nothing else is done to compensate for the loss of this product’s contribution. Being a proactive stock exchange, SGX, we believe, should come up with new solutions to ensure revenue generation for its derivatives business remain robust.

Valuation & Recommendation 

Keeping our BUY rating, Target Price of S$8.90; share price may be under pressure in the near term, pending resolution of the current situation. 

  • SGX’s stock price may come under pressure following this negative development. However, in our view, SGX’s stock price should still be supported by its stable and sustainable dividend yield of 4% and its continued efforts to drive market liquidity and new product initiatives, which should bear fruit in the coming years, including the recently announced trading link with Bursa Malaysia. 
  • Our Target Price is based on the dividend discount model, implying 21x FY19F PE.

Singapore Research DBS Vickers | Sue Lin LIM DBS Vickers | 2018-02-12
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