SINGAPORE EXCHANGE LIMITED (SGX:S68)
Singapore Exchange - Recent Positives In The Price
- We now appreciate Scientific Beta better, and raise Singapore Exchange (SGX:S68)'s FY20-22F EPS by 0.5-4.8% to factor in its earnings potential. Our Target Price rises to S$9.40.
- We stay wary of competition risks, and think SGX is fairly valued at 22.4x FY21F P/E, its 10-year historical mean. Maintain Hold with c.3% yield.
- Jan monthly data show 12.1% and 27.0% m-o-m surge in derivatives volume and SDAV respectively, but still below our FY20 projections.
Good news priced in; competition risk from HKEx ignored
- We think SGX’s recent share price strength has priced in the stronger Jan market statistics and its 93%-stake acquisition of Scientific Beta for €186m (c.S$280m). We raise our FY20-22 EPS forecasts by 0.5-4.8% to factor in the latter's earnings contribution. Our Target Price thus increases to S$9.40, still based on its 10-year historical mean of 22.5x FY21F P/E. Maintain Hold.
- Downside risks include unfavourable regulatory changes and potential launch of MSCI A-share futures by HKEx in 2H20.
- Upside risks include positive dividend surprise, and faster asset under management (AUM) growth at Scientific Beta.
Scientific Beta makes a good strategic fit in the medium term
- We recently attended SGX’s analyst briefing where Scientific Beta CEO Noel Amenc was also present. Apart from potential synergies via cross-selling and product innovation, we like SGX's acquisition of Scientific Beta for the latter's
- low client attrition risk (mainly pension funds),
- recurring revenue (based on 5bp of AUM on average), and
- positioning in a high-growth area (factor, passive, and socially responsible investing).
- However, we are cautious of the near-term M&A excitement as any new product will take some years to develop, launch and build liquidity. Established since 2012, Scientific Beta has been profitable for around three years, implying a current cost base of c.US$6m- 10m. With this and depending on its AUM growth rates, our scenario analysis shows possible net profit accretion of S$0.6m-5.3m and S$13.0m-24.2m to our FY20F and FY21F forecasts respectively.
- We expect little financial impact from Scientific Beta in FY20F given only five months of contribution and one-off costs (integration, amortisation, professional fees), but it should be EPS-accretive from FY21F.
- See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.
Jan volumes encouraging, but below historic average levels
- Jan’s monthly market statistics revealed a higher securities daily average value (SDAV), surging 23.6% m-o-m and 27.0% y-o-y to S$1.2bn on conclusion of Phase 1 deal between the US and China, as well as impact from the evolving Covid-19 virus.
- Increased demand for China A50, FX and Nifty futures underpinned the 12.1% m-o-m and 4.5% y-o-y growth in derivatives volumes to 19.5m, which still fall short of our monthly projected run-rate for FY20F, and below the average levels seen in 2Q19-1Q20.
- Near-term volatility has also not led to a stronger pick-up in open interest for equity index derivatives (Jan: 4.0m), one of the lowest levels over the past 12 months.
NGOH Yi Sin
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-02-17
SGX Stock
Analyst Report
9.40
UP
9.000
