Singapore Exchange - CGS-CIMB Research 2020-06-30: Awaiting Synergies From Recent M&As

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Awaiting Synergies From Recent M&As

Singapore Exchange (SGX:S68) is acquiring the remaining 80% stake in BidFX, a cloud-based FX trading platform for c.S$179m; transaction expected to close by Jul 20.
This acquisition could expand its market potential into OTC currencies, and grow FICC and DCI revenue contribution by c.5% pts in a few years’ time.
Upgrade from Reduce to HOLD with unchanged S$8.00 Target Price as we think the downside earnings risks are largely in the price.

SGX announced it will be acquiring the remaining 80% stake in BidFX for US$128m (c.S$179m), with an additional amount of up to US$25m to be paid to sellers in 2022 if certain revenue targets are met; the 20% stake was first purchased in Mar 19 for US$25m. This acquisition will be funded by external borrowings and is expected to complete in Jul 20.
Management does not expect it to have a material impact on Singapore Exchange’s FY21F financial results (associate income in FY20F also not material), but expects it to be overall EPS accretive.
BidFX is a cloud-based, multi-dealer FX trading platform for institutional investors, has achieved 2017-19 revenue CAGR of > 60% and is EBITDA positive.
We like the transaction as a potential growth driver in the medium term, but it is unlikely to mitigate the near-term earnings gap left by the expiry of MSCI licensing (in Feb 21).

Singapore Exchange has over 80% market share in USD/CNH and > 60% market share in INR/USD, which are two of its biggest FX futures products. FX futures accounted for c.11% of its 9MFY20 total derivatives volumes and c.5% of overall revenue. Management sees potential in this area as the exchange-traded currency futures volume forms only 2% of the OTC currency trading size, which is the largest financial market globally with S$6.6tr traded OTC daily.
Apart from having new capability for OTC product workflow, Singapore Exchange is also looking to introduce more FlexC futures to broaden its customer base. With the full consolidation of BidFX, further synergies from Scientific Beta and potentially more bolt-on acquisitions, Singapore Exchange targets to achieve one-third revenue contribution from its fixed income, currency and commodities (FICC) and data, connectivity and indices (DCI) segments, in the next 3 to 4 years (currently c.28% of 9MFY20 topline).

Singapore is the largest FX centre in Asia Pacific, and third-largest internationally after London and New York, with a total of US$640bn FX traded over-the-counter (OTC) daily in Singapore. This is an even bigger market globally, with US$6.6tr traded OTC daily while only US$0.16tr (2%) was traded on Singapore Exchange in 2019.
Singapore Exchange currently offers a suite of 22 currency futures and options contracts, with more than 80% market share in USD/CNH and over 60% market share in INR/USD, its two biggest FX products. FX futures accounted for c.11% of its 9MFY20 total derivatives volumes and c.5% of overall revenue (in our estimates).
Management sees opportunities in expanding into the larger OTC FX market via its consolidation of BidFX, which will not only equip SGX with the capability for OTC product workflow, but also new product offerings (e.g. Asian non-deliverable forwards, G10 spot & swaps) for a bigger customer base.
We are positive on the medium-term growth potential of this transaction as such volumes could take at least 1-2 years to ramp up significantly; but this is unlikely to offset the near-term earnings gap left behind by the MSCI licence expiry (see previous note: Singapore Exchange - CGS-CIMB Research 2020-05-27: MSCI Licence Agreement Expires Feb 2021).

Based on the current market statistics till June MTD, we expect 4QFY20F securities daily average value traded (SDAV) to be S$1.5bn (-7% q-o-q, +36% y-o-y), while derivatives traded volume could fall c.30% q-o-q and c.19% y-o-y to approximately 53.4m.
Given the stellar results and high base in 3QFY20, and possible one-off costs from acquisitions, we forecast Singapore Exchange to report net profit in the range of S$98m-102m in 4Q20F, which would be down y-o-y and q-o-q (3QFY20: S$137.5m, 4QFY19: S$103.9m). However, on a full-year basis, our forecasted FY20F net profit of S$445m for SGX would still register y-o-y growth of 13.7%.

We believe the recent SGX share price correction has largely factored in the potential earnings loss from the MSCI licensing expiry in Feb 2021. Hence, we upgrade Singapore Exchange from Reduce to HOLD, with unchanged FY20-22F EPS and Target Price of S$8.00 (still pegged to 0.5 s.d. below historical average of 20.7x FY21F P/E). The stock offers c.4% FY20-22F dividend yield and has net cash of S$503m as of end- 3QFY20.
See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.
Key downside risks to our HOLD rating are market risk-off mode and the competing launch of MSCI China A Index futures by HKEX (possibly in 2H20F).
Potential upside risks could come from stronger market volumes, higher-than-expected dividend payout and more synergistic M&As.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-30

SGX Stock Analyst Report HOLD UPGRADE REDUCE 8.000 SAME 8.000