Singapore Exchange - RHB Invest 2020-05-27: Derivatives Business Hit By MSCI Agreement Expiry


Singapore Exchange - Derivatives Business Hit By MSCI Agreement Expiry

  • Singapore Exchange (SGX:S68) is reducing its licence agreements with MSCI from Feb 2021, with an expected 10-15% hit to its FY21 earnings. SGX share price could see short-term weakness, but ought to be supported by respectable yields.
  • Stay NEUTRAL with new SGD8.60 Target Price from SGD9.70, 13% downside, offset by c.4% FY20F (Jun) yield. Our Target Price is pegged to 24x FY21F P/E.

SGX is reducing its licence agreements with MSCI from Feb 2021.

  • The two will retain their partnership on the MSCI Singapore Index products and will both work to extend it well beyond 2021 – the MSCI Singapore futures and options remain listed. However, licence agreements for all other MSCI products will expire in Feb 2021. See SGX Announcements.

SGX sees a 10-15% hit for FY21 earnings.

  • The affected MSCI contracts account for 15% of equity derivatives average daily contracts (DADC) and 12% of total DADC – the latter includes currencies and commodities. Assuming 12 months of impact, ie starting from July, and before mitigating actions, SGX sees FY21 net profit being hit by 10-15%.
  • We cut FY21F net profit by 11%, mainly due to our reduction of FY21F DADC by 10% to 944,000. For the same reason, we also cut our FY22F net profit by 11%.

Respectable dividend yield.

  • We forecast a FY20 DPS of 36 cents/share – giving a c.4% dividend yield – based on an 85% payout ratio. However, given our forecasted FY21 earnings contraction y-o-y, we have assumed FY21 dividend of a lower 31 cents/share. See SGX Dividend History.
  • Our SGD8.60 Target Price is pegged to 24x FY21F EPS, ie 1SD above the 4-year mean of 22.5x. This news will lead to investors reviewing SGX’s valuation, particularly given the 15% SGX share price rise over the past six months.
  • On the other hand, SGX remains in a net cash position – with a monopoly over the trading of Singapore-listed equities – and downside is seen as limited. Hence, we maintain our NEUTRAL call.
  • See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.

Global economic fluctuations and geopolitical developments are key risks.

  • Downside risk: If the COVID-19 pandemic is prolonged, trading volumes could experience a gradual decline from current high levels.
  • Upside risk: If the pandemic is resolved soon, we could see another round ding volume surges.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-27
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 8.60 DOWN 9.700