Singapore Exchange - CGS-CIMB Research 2020-03-04: Safer Haven; Upgrade To ADD


Singapore Exchange - Safer Haven; Upgrade To ADD

  • We upgrade Singapore Exchange (SGX:S68) from Hold to ADD on recent pullback; it offers 8% upside to our Target Price and a 3.5% dividend yield; it is now our top pick in the financial sector.
  • We see Singapore Exchange as a near-term beneficiary of market volatility, and defensive play amid macro concerns. Scientific Beta adds a structural growth element.
  • Feb monthly data was encouraging: SDAV surged to S$1.35bn (+11% m-o-m, +28% y-o-y), and derivatives contracts to 24m (+23% m-o-m, +32% y-o-y).

Upgrade from Hold to Add with 11.5% total return

  • We see value emerging from Singapore Exchange’s recent share price retreat. We upgrade the stock from Hold to Add, with unchanged EPS and Target Price of S$9.40, still pegged to its 10-year historical mean of 22.5x FY21F P/E.
  • See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.
  • The possibility of a 2H20F launch of MSCI A-share futures by HKEx, pending approval from China Securities Regulatory Commission (CSRC), remains a key risk for Singapore Exchange’s China A50 futures, which formed 44% of its FY19 derivatives volumes and c.17% of topline. However, we believe this could be mitigated by
    1. its first-mover advantage,
    2. time taken for new products to build liquidity and traction, and
    3. potential growth in overall market size.
  • Potential catalysts are a dividend surprise, and faster asset under management (AUM) growth at its recent acquisition (Scientific Beta).

Feb market volumes gave sentiment boost

  • Feb volumes delivered greater growth assurance; securities daily average value (SDAV) grew 11% m-o-m and 28% y-o-y to S$1.35bn, a level last seen 2 years ago. Market volatility arising from Covid-19 fears also underpinned hedging demand, resulting in 23% m-o-m and 32% y-o-y surge in derivatives contracts to 24m. This is now slightly ahead of our monthly projected run-rate for FY20F and comparable to the average level during 2Q19- 1Q20.
  • Total open interest continues its recovery path since Dec (Jan: 6.0m, Feb: 6.5m), while improving derivatives’ average contract rate due to lower rebates is also a tailwind for Singapore Exchange. Should these positive trends persist, we see potential upside to our/consensus FY20F numbers.

We expect DCI to see structural growth in the medium term

  • Singapore Exchange’s investment in Scientific Beta testifies to its recent reorganisation of three main business lines, including the data, connectivity & indices (DCI) segment, as well as its renewed focus to pursue growth opportunities across multiple asset classes. With the latest acquisition, Singapore Exchange could build its index business capabilities to leverage on the global shift towards passive and factor investing.
  • Its business model of recurring revenue base and low client attrition could also look appealing in the current times. Our current AUM growth assumptions for Scientific Beta are conservative at 10% p.a. over FY21- 22F, in our view, given its historical record of 73% 3-year CAGR, signalling room for further upside from faster AUM expansion.
  • We think jointly-developed indices are in the pipeline (likely in 2Q20F), to which a successful launch could also re-rate the stock.
  • Please read our earlier note: Singapore Exchange - CGS-CIMB Research 2020-02-17: Recent Positives In The Price for more details on the acquisition.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report ADD UPGRADE HOLD 9.400 SAME 9.400