Singapore Exchange - DBS Research 2020-01-24: Acquisition For The Beta (Better)

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Acquisition For The Beta (Better)

Net profit of S$99m (+3% y-o-y/ -13% q-o-q) supported by Fixed Income, Currencies and Commodities (FICC).
Announced EUR186m earnings accretive acquisition of Scientific Beta, a smart beta index firm to accelerate Data, Connectivity and Indices’ (DCI) growth.
Interim dividend of 7.5 Scts; dividend yield of c.3.4% continues to support share price.

SINGAPORE EXCHANGE (SGX:S68) is targeting to double revenue from Data, Connectivity and Indices (DCI), as well as Fixed Income, Currencies, Commodities (FICC) segments in the next five years as Singapore Exchange looks at various investment opportunities and bolt-on acquisitions to fuel growth.
Singapore Exchange announced its first bolt-on earnings accretive acquisition of Scientific Beta, a smart beta index firm, as it targets growth in the DCI space. We believe Singapore Exchange will continue to benefit from strong demand for risk management instruments as it continues to execute growth strategies to build a multi-asset exchange.
We believe share price should continue to be well-supported by its absolute dividend of 30 Scts/year, implying c.3.4% yield at current level, amid a lower yielding market environment.
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Strong growth in FICC (+20% y-o-y, -15% q-o-q) and DCI supported weaker performance from Equities. Total revenue growth (S$231m, +3% y-o-y, -7% q-o-q) outpaces expenses which were relatively flat where staff costs were offset by lower consultancy and legal fees.

Overall, currencies contracts continue to see double-digit growth of 13% y-o-y, led by USD/CNH volumes that grew 33% y-o-y and INR/USD volumes that grew 2% y-o-y, aided by overnight T+1 volumes which currently contributes ~30% of total currency volumes. Open interest of US$7.9bn increased 90% y-o-y. Iron ore volumes increased 5% y-o-y on elevated supply concerns, with Singapore Exchange continuing to retain its dominant market share of c.98%.

Derivatives volumes in the quarter was weaker on the back of lower market volatility as trading volumes declined 15% y-o-y/13% q-o-q, primarily as trading volumes in key equity index contracts (A50, Nifty, Nikkei index futures) declined. This was supported by stronger revenues from cash equities trading and clearing revenue which improved 7% y-o-y/2% q-o-q as Securities Daily Average Value (SDAV) at S$1.07bn improved 9% y-o-y and 1% q-o-q.

Working on a multi-asset strategy. Singapore Exchange has previously shared that it will be looking at various investment opportunities and bolt-on acquisitions to fuel growth, especially in the FICC and DCI space. An independent index provider specialising in smart beta strategies especially in factor-based and risk-managed solutions, Scientific Beta grew its assets under replication by 10x in four years to US$54.7bn and is currently profitable with revenues of c.EUR20m according to Singapore Exchange.
Growth in factor investing globally is expected to reach US$2.7 trillion by 2020. Singapore Exchange will be purchasing a 93% stake and the transaction is “financially attractive” and is expected to be earnings accretive in FY21F upon completion. The acquisition will be funded by external borrowings given low EUR interest rates, which we believe is a positive step as Singapore Exchange seeks to optimise its capital structure.

The acquisition is expected to be largely complementary as Singapore Exchange is able to broaden its existing index offering in a fast-growing index space, capitalising on the broader growth of passive investing. There are also potential linkages with Singapore Exchange’s product platform and opportunities for cross-selling, given Scientific Beta’s relationships with > 60 asset owners and asset managers, mostly across Europe and the US.

We maintain BUY on Singapore Exchange with a revised Target Price of S$9.60 as we begin to see Singapore Exchange’s multi-asset exchange strategy come to fruition with its latest bolt-on acquisition.
We derive our revised Target Price of S$9.60 based on the dividend discount model (k=7%, g=4%, ROE=38%) as we revise our ROE assumptions from 37%, as we believe the organisation restructure is able to continue driving ROE improvement with the debt-funded acquisition.
Our Target Price implies c.21x FY21F PE.
Our earnings revision of c.2%for FY21F comes on the back on growth expectations from DCI business.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-01-24

SGX Stock Analyst Report BUY MAINTAIN BUY 9.60 UP 8.900