Singapore Exchange - CGS-CIMB Research 2020-05-27: MSCI Licence Agreement Expires Feb 2021


Singapore Exchange - MSCI Licence Agreement Expires Feb 2021

  • We cut our SGX's FY20-22F EPS by 2.2-10.0% to reflect lacklustre Apr-May market statistics and the MSCI licence expiring on Feb 2021.
  • This affects SGX’s entire MSCI product suite (12% of derivative volumes FYTD 2020) except for MSCI Singapore futures and options.
  • We downgrade the stock from Add to REDUCE; our S$8.00 Target Price is now pegged to 0.5 s.d. below historical average of 20.7x FY21F P/E.

MSCI licence agreement to expire Feb 2021

  • SGX (SGX:S68) reported that it will be reducing its licence agreement with MSCI from Feb 2021 after a 23-year partnership, but its MSCI Singapore futures and options (c.5% of FYTD derivatives volume) will remain listed on SGX. See SGX Announcements. This follows an announcement by HKEX on its signing of licensing agreement with MSCI to introduce a total of 37 futures and options contracts, even as they are subject to regulatory approvals and market conditions.
  • There was no update on the earlier announcement on the planned launch of MSCI China A Index Futures, which could potentially be another downside risk for SGX.
  • The FTSE China A50 futures is SGX’s biggest derivative product at 37% of FYTD derivatives volumes. We understand that such MSCI licence agreements are not exclusive.

Big hit to one of its growth engines; cut FY21-22F EPS by c.10%

  • Derivatives segment accounted for c.51% of SGX’s 9MFY20 revenue, and major contributors apart from China A50 are MSCI Taiwan Index Futures, Nikkei, Nifty, iron ore, FX and other commodities. These products are largely not affected except for MSCI Taiwan; together with its entire MSCI product suite (ex-Singapore), this could result in a 10-15% negative impact on FY21F core earnings on a pro forma basis (assuming zero contribution from Jul 20 onwards and before mitigating actions), based on management’s estimates.
  • We cut our SGX's FY21-22F EPS by c.10% to reflect the loss in revenue stream due to the licence expiry.

Downgrade to REDUCE with a lower Target Price of S$8.00

  • Apart from the direct loss of MSCI-related income, we think there could be indirect impact arising from competitive headwinds, although new contracts (from HKEX) typically take a few years to gain sufficient liquidity. Market stats for April and May were lacklustre (after a stellar 3QFY20), which could result in a y-o-y and q-o-q weaker 4QFY20F if such trends persist into Jun.
  • While management is likely to share more on its multi-asset strategy and FX growth in the upcoming 4Q20F results, we see scant re-rating catalysts in the near-term. Hence, we downgrade the stock from Add to REDUCE, with a lower Target Price of S$8.00, now pegged to 0.5 s.d below historical mean of 20.7x (previously 24.4x).
  • See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.
  • Upside risks could come from synergistic M&As, higher than expected FY20F DPS and faster traction in Scientific Beta.
  • See FIgure5 in attached PDF report for comparison of listed bourses including Bursa Malaysia, Hongkong Exchange, London Stock Exchange, Nasdaq Inc, Deutsche Boerse AG and CME Group Inc.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-27
SGX Stock Analyst Report REDUCE DOWNGRADE ADD 8.00 DOWN 10.50