Singapore Exchange - CGS-CIMB Research 2020-02-17: Recent Positives In The Price


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
    1. low client attrition risk (mainly pension funds),
    2. recurring revenue (based on 5bp of AUM on average), and
    3. 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 | https://www.cgs-cimb.com 2020-02-17
SGX Stock Analyst Report ADD MAINTAIN ADD 9.40 UP 9.000