Singapore Exchange - OCBC Investment 2020-08-03: Focusing On Strategic Growth


Singapore Exchange - Focusing On Strategic Growth

  • SGX closed FY20 with revenues crossing the SGD1bn mark for the first time and 4QFY20 net profits of SGD121mn (+19% y-o-y/-12% q-o-q) driven by equities.
  • Higher final quarterly dividend of 8 cents/share proposed. FY21E annualized dividends guided at an improved 32 cents/share, implying ~3.9% yield.
  • While FY21E market volumes may moderate, management highlights plans to expand its product suite to help mitigate impact from the upcoming February 2021 expiry of ex-Singapore MSCI licenses.
  • HOLD rating is maintained, adjusting our fair value to SGD8.30 implying 21.3x FY21E PER.

Solid FY20 revenues driven by equities, which contributed 72% of total revenues

  • SGX (SGX:S68)'s FY20 net profits of SGD472mn gained 21% y-o-y and revenues crossed the SGD1bn mark, up 16% and marking a new achievement since listing. EBITDA of SGD656mn grew 25%. Activity levels were higher last year in currencies and commodities volumes (which grew 24% to 51.2mn contracts) and cash equities (traded value grew 28%), while equity derivatives volumes fell 3% from a year ago (192.5mn contracts).
  • SGX ended the year with solid financial indicators – high EBITDA and OP margins of 62% and 54% respectively, while ROE was 40%. The company proposed 8 cents/sh 4Q dividend, bringing total FY20 dividend to 30.5 cents per share.
  • Expenses grew 8% y-o-y to SGD487mn due to increased variable costs (staff & royalties expenses) and higher depreciation from implementation of new systems. Excluding Scientific Beta, expenses gained 6% y-o-y. FY20 capex spend of SGD41mn was below prior expectation of SGD45-50mn. In FY20, the company had some success in cross selling, with ~18% of its customer base from new customers (across FX, equities and commodities segments).
  • For 4QFY20, SGX's revenues grew 12% y-o-y to SGD278mn supported by equities revenues (+11%), DCI (+40%) and FICC revenue (+2%), with average fee per contract for equity, currency and commodity derivatives improving 9% to $1.24. Equity derivatives top line fell 4% y-o-y, due to lower volumes (42mn) although there was some mitigation from higher treasury income. 4Q expenses gained 3% with higher staff costs that included Scientific Beta.
  • Final quarterly dividend of 8 cents/share was proposed, up 0.5 cents/share. Balance sheet remained strong in net cash position and EBITDA/interest ratio of 226x.

FY21 guidance, higher FY21E dividends of 32cents/share -

  • SGX's annualised dividend guidance going forward was raised ~7% from 30 cents/sh in FY20 to 32 cents/share in FY21E (i.e. implying ~3.9% yield based on 31 July 2020’s closing price of SGD8.17). See SGX Dividend History.
  • Total expenses are expected to range from SGD535-545mn (or lower by SGD15mn excluding expenses linked to the two acquisitions in FY19). Capex is expected at SGD55-60mn (or lower by SGD11mn excluding BidFX related capex).

Keeping its focus on strategic growth objectives, although no specific targets were provided

  • Following the steps taken in FY20 (full acquisition of BidFX and Scientific Beta), SGX plans to continue growing its FICC (build up Asian NDF volume and G10 spot and swaps, platform for OTC and on-exchange Fx through BidFX acquisition, increase financialization of its commodity suite-as macroeconomic proxies to Asia’s growth-through the Titan Pro platform and Titan hub) and DCI businesses (thematic indices via Scientific Beta, new indices in sustainable capital and finance) to diversify its revenue stream.
  • Within its commodities portfolio, SGX iron ore contracts increased 25% y-o-y to 21mn contracts, close to 100% market share and has become the market CE bond reference, heading towards its current benchmark positions in rubber and freight pricing.
  • For equities, SGX plans to expand its suite of derivatives available, with plans to include increasingly in demand ESG related opportunities and plans to launch more single stock futures and structured products.

Expanding suite of derivatives products ahead of expiry of non-Singapore MSCI product licenses in February 2021.

  • To mitigate the impact of the winding down of MSCI TW futures (~12% of FY20 equity derivatives volumes) ahead of the expiry of SGX’s MSCI licensing agreement (ex-SG indices), SGX introduced the SGX FTSE Taiwan Index futures on 20th July, a broadbased index covers ~80% of Taiwan listed corporates by market capitalization. Progress has been encouraging with first week of trading exceeding $1.5bn.
  • The company plans to introduce ESG related opportunities and grow its product shelf of single stock futures and daily leverage certificates (DLCs, new underlines including Alibaba, NetEast and Meituan were recently introduced, bringing total DLCs to > 100) while work is ongoing to enhance its securities and borrowing program to a wider pool of securities.

Lifting fair value to SGD8.30

  • Lifting fair value of SGX to SGD8.30 implying 21.3x FY21E PER, maintaining a neutral stance given fair valuations and concerns over increasing competition (impending launch of MSCI China A futures by HKEx) expected for its equity derivatives growth prospects, a key segment which accounted for ~46% of its equity derivative volumes in FY20: the potential launch date of MSCI China A derivatives by HKEx is uncertain at this point but poses medium term concerns given SGX’s FTSE China A50 contracts make up ~45.8% of total FY20 equity derivatives volumes.
  • Execution of its strategic objectives will be key to easing the overhang over the upcoming ex-Singapore MSCI licenses expiry in February 2021 and potential A-share futures competition from HKEx.
  • 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/ 2020-08-03
SGX Stock Analyst Report HOLD UPGRADE SELL 8.30 UP 8.000