Singapore Exchange - OCBC Investment 2020-05-28: Ex-SG MSCI Agreement To Expire

SINGAPORE EXCHANGE LIMITED (SGX:S68) | SGinvestors.io SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Ex-SG MSCI Agreement To Expire

  • Singapore Exchange (SGX) and MSCI have both mutually agreed to let SGX’s licence agreement beyond MSCI Singapore expire in February 2021.
  • Management estimates potential negative impact of 10-15% to its FY21E bottom line, on a pro forma basis before mitigating actions are considered.
  • Fair value is lowered to SGD8 implying 21.6x FY21E PER. Our prior advice to trim positions is maintained.



Key highlights of SGX’s virtual management update

  • Singapore Exchange (SGX:S68) and MSCI have both mutually agreed to let SGX’s licence agreement (beyond MSCI Singapore suite) to expire in February 2021. Futures and options relating to MSCI Singapore will remain listed on SGX, with the partnership with MSCI to continue well beyond 2021. See SGX Announcements.
  • Impacted contracts are MSCI Taiwan (9.6%) and MSCI NTRs (Net Total Returns, 2.2%) which contributed about 11.8% of its April FY-to date daily average volume.


Management estimates potential negative impact of 10-15% hit on FY21E net profits

  • Management estimates potential negative impact of 10-15% hit on FY21E net profits on a full year pro forma basis and prior to any potential mitigating actions. MSCI contracts make up about 15% of its equity derivatives daily average volumes (DAV) and about 12% of total derivatives DAV.
  • Despite the negative impact, management reiterated its commitment to a progressive dividend policy.


Strategy of pan-Asia, multi-asset solutions offering on an open architecture was reiterated.

  • SGX plans to take mitigating actions through deepening and widening of its products offering in Asia by developing more derivative products on its own or through partnerships. Management is open to bolt-on acquisitions to scale its business further, and believes there are opportunities to offer thematic and bespoke solutions to cater to different investor needs in the current low rate and passive investing environment.


Share price has weakened

  • SGX share price has weakened following our advice to trim positions last month due to raised valuations amid record market volatility and higher derivative volumes which was expected to normalize. SGX’s out-performance year to date vs Singapore banks within the Singapore financials index looks likely to narrow further as near term investor sentiment should remain weak, following news today that HKEx has signed an agreement with MSCI to introduce new products based on MSCI Asia and EM indices.


Fair value is lowered to SGD8

  • Our estimates and fair value is lowered to SGD8 implying 21.6x FY21E PER (vs its historical average multiple of 20.4x).
  • Our prior advice to trim positions is maintained given unattractive valuations and concerns on its derivative growth prospects, a key segment which accounted for half of its revenues in FY19 (while date of MSCI China A potential launch by HKEx is uncertain, it poses concerns given SGX’s FTSE China A50 contracts make up about 37% of total volumes).
  • Looking ahead, following its recent acquisition of index provider Scientific Beta, we await updates on the integration and extent of earnings accretion in FY21E.
  • We view the recent acquisition positively for the research-based index construction capabilities, index calculation services and potential to expand into smart ESG and green investing. As a result of the deal, SGX is expected to service a wider range of customers across institutional client types and geographies and develop a broader range of products.
  • See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.





OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-05-28
SGX Stock Analyst Report SELL DOWNGRADE HOLD 8.00 DOWN 8.600



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