Singapore Exchange - CGS-CIMB Research 2020-07-30: Building On Its Multi-Asset Strength

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SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Building On Its Multi-Asset Strength

• SGX's 4QFY20 core net profit of S$121m (+16.6% y-o-y, -11.9% q-o-q) was above our/ consensus expectations. Higher quarterly DPS implies 3.9% FY21F yield.
• Improving traction in FTSE Taiwan Index Futures could mitigate earnings loss from MSCI licence expiry; recent M&As offer much synergies to be reaped.
• Upgrade from Hold to ADD on results beat, priced-in downside risks and potential re-rating catalysts, with S$9.00 Target Price (pegged to historical mean).

SGX's 4QFY20 results beat; quarterly DPS raised to 8.0Scts (previously 7.5Scts)

• Singapore Exchange (SGX:S68) reported 4QFY6/20 net profit of S$121m (+16.6% y-o-y, -11.9% q-o-q), beating our and Bloomberg consensus expectations.
• FY20 net profit of S$472m (which included S$6.2m impairment loss on associated company and S$5.5m JSS credit) grew 20.6% y-o-y and formed 106%/104% of our/consensus full-year forecasts.
• FY20 expenses were 8% higher y-o-y at S$487m (or +6% to S$475m if excludes Scientific Beta), at the lower end of its earlier guidance; the group also saw better jaw ratio of 7% in FY20.
• Final quarterly DPS of 8.0Scts was declared, bringing FY20 DPS to 30.5Scts (69% payout ratio) and implying annualised DPS of 32Scts in FY21F (3.9% yield). See SGX Dividend History.
• ROE scaled another record high in FY20, at 40% (FY19: 36%)

FY20 revenue surpassed S$1bn, the highest since its listing

• SGX's FY20 revenue rose 16% y-o-y to S$1.05bn, with double-digit growth across all segments (FICC +23%, equities +19%, DCI +19%). Securities average traded value (SDAV) climbed to S$1.3bn in FY20 on higher turnover velocity (45% vs. 36% in FY19), which drove higher clearing fees as average clearing rate held steady on product mix changes and higher participation from market makers.
• Derivatives revenue increased on stable volumes (fewer China A50 contracts offset by higher volumes in iron ore, currency and Nikkei 225 futures) and higher treasury income (higher margin balances). We expect further synergies for FICC from BidFX’s consolidation and Scientific Beta (contributed S$19m in FY20 to its DCI segment) to remain its medium-term growth driver.

Catalysts to watch for

Can SGX’s new FTSE Taiwan Index Futures replace its MSCI Taiwan equivalent? Potentially yes

• SGX on 1 Jul 2020 announced that it will be partnering with FTSE to introduce SGX FTSE Taiwan Index Futures, which commenced trading on 20 Jul and received approval from the US Commodity Futures Trading Commission (CFTC) on 24 Jul (see Figure 10 for key product differences). This launch serves to replace the outgoing SGX MSCI Taiwan Index Futures, whose licence will expire in Feb 2021.
• According to management, SGX FTSE Taiwan Index Futures have received strong support from trading participants and market makers (50 entities across 17 clearing members) during launch week, with total turnover surpassing US$1.5bn and open interest exceeding US$191m. Volumes for the HKEX’s MSCI Taiwan Index Futures, on the other hand, seem to be gaining traction at a slower rate. While this is still in early days, we believe the earnings loss from the MSCI licence expiry (10-15%, as guided by management) could possibly be less than initially feared, if such positive momentum continues for SGX. This would also pose upside potential to our FY21F EPS, which we have kept largely unchanged.
• The 13.4% cut in our SGX's FY21F EPS forecast has factored in:
  1. 6% lower average clearing fees for derivatives, given that clearing fees for the SGX FTSE Taiwan Index Futures are waived till end-2020 but overall derivatives volumes are projected to be stable; and
  2. 10% decline in SDAV (given the high base in FY20).
• We think the improving traction in SGX FTSE Taiwan Index Futures could mitigate the earnings gap left by its predecessor’s licence expiry in Feb 2021, which has been factored in our FY21F EPS decline of 13.4%; this also accounts for marginally lower equity turnover even as we expect low interest rates and macro uncertainty to sustain capital markets’ activities and hedging demand. Other catalysts include more bolt on acquisitions, and faster ramp-up of its recent acquisitions.

Upgrade SGX from Hold to ADD

• We think the earnings risk from the expiry of its MSCI licensing has been largely priced in for SGX, and we see potential upside from successful client migration to its new FTSE Taiwan Index Futures and expanded derivatives suite. The prolonged interest rate environment and continued macro uncertainty could also sustain equity turnover in the near term, while derivatives contracts could see higher demand from more risk management activities, in our view.
• We also see more synergies to be reaped from its recent acquisitions of Scientific Beta and BidFX, which allows for new customer acquisitions (18% of total known customer base in FY20 are new customers), expanded product offering (e.g. ESG solutions, thematic indices) and entry into the bigger over-the-counter (OTC) FX market.
• Upgrade SGX from Hold to ADD with a higher Target Price of S$9.00, now pegged to its 10-year historical mean of 22.6x CY22F P/E as we roll forward our valuation (previously 20.7x).
• See SGX Share Price; SGX Target Price; SGX Analyst Reports; SGX Dividend History; SGX Announcements; SGX Latest News.
• Potential re-rating catalysts are more bolt-on acquisitions, and faster traction for FTSE Taiwan Index Futures and Scientific Beta.
• Further negative developments from the MSCI A-share futures, and market risk-off are downside risks to our Add call.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-30

SGX Stock Analyst Report ADD UPGRADE HOLD 9.00 UP 8.000