Singapore Exchange (SGX) - UOB Kay Hian 2021-04-26: An Exchange With More To Offer. Initiate Coverage with BUY


Singapore Exchange (SGX) - An Exchange With More To Offer. Initiate with BUY

  • Singapore Exchange (SGX) is a multi-asset exchange with a range of liquid products, securing customer retention through its high volume market share in key products such as the FTSE Taiwan Index. SGX is also benefitting from structural tailwinds such as the electronification of OTCs and passive investing.
  • An added bonus could surface from Singapore-based secondary listings of foreign listed entities such as Grab or Sea Ltd.
  • Initiate coverage on Singapore Exchange (SGX:S68) with a BUY. Target price: S$12.35, with 17% upside.

Singapore Exchange (SGX:S68) - A multi-asset exchange ensures resilient revenue stream.

  • Singapore Exchange (SGX)’s strength lies in its multi-asset marketplace which includes a wide range of liquid futures and options products in key asset classes such as equities, currencies and commodities. Derivatives (including currencies, commodities and equities) have contributed to a more substantial portion of revenue over the years (30% of revenue in FY14 to 49% in FY20) and is an important investment tool in a volatile investment environment.
  • As a multi-asset exchange, SGX also allows for customer stickiness. The group said that cross asset margin offsets result in customer cost savings of 30-90%. This is facilitated by the deep liquidity and high volume market share of certain key products such as the FTSE Taiwan Index and iron ore derivatives.

Volatility remains; MSCI changes could boost derivative volume.

  • Turnover velocity remains elevated from the effects of COVID-19. SGX's 3QFY21 daily average traded value (DAV) of S$1.52b is still almost 50% higher compared with FY19 levels (3QFY19: S$1.02b).
  • Geopolitical risks and a low interest rate environment are factors which will likely keep DAV elevated. Besides, changes to the MSCI Singapore Index over the coming months such as the addition of foreign-listed entities could boost volumes in MSCI Singapore Index derivatives (7% of SGX’s equity derivatives contracts) given the hedging required.
  • Other initiatives to retain trading volumes could potentially take the form of secondary listing of foreign-listed entities such as Grab or Sea Ltd on the SGX.

Securing growth through structural tailwinds: electronification of OTC, and index business from passive investing.

  • As a result of regulatory reforms since the 2008 financial crisis, the derivatives markets have seen the implementation of higher level of compliance requirements which has shifted over-the-counter (OTC) derivatives to exchange-traded derivatives. With higher compliance standards pending, this will benefit SGX’s currency derivatives business in which volume growth is likely to be sustained. The trend in passive investing will also continue to grow the group’s index business.

Blue-sky scenario: A Grab and Sea addition.

  • Recent news reports have surfaced of a potential secondary listing of Grab on SGX. Assuming that both large Singapore-based companies, Grab and Sea Ltd have a secondary listing on the SGX, we expect that this could increase cash equities DAV by 6-40%, assuming there is no leakage in trading volume from other large caps. This is based on 5-35% of Sea Ltd (SE US) turnover on the Nasdaq.
  • For Grab, we have used the DAV to market capitalisation ratio of 0.7% (similar to other foreign listed tech companies) at its indicated special purpose acquisition company (SPAC) listing price on the Nasdaq to estimate its potential US-listed DAV.

Going from strength to strength from an exceptional 2020.

  • We forecast SGX's revenue and earnings to have a 5-year CAGR of 3.9% for FY19-23. Growth engines would come from the group’s Data, Connectivity and Indices (DCI) segment given the acquisition of Scientific Beta and the growth of factor-based investing. As such, the segment could see a 5-year CAGR of 9.4% for FY19-23.
  • We believe that currency derivatives will remain strong, given SGX’s large market share in US$/Rmb and the shift from OTC FX options trading to listed exchanges.

Initiate coverage on SGX with BUY and a target price of S$12.35, with 17% upside.

  • See
  • Our target price for SGX is pegged to peers’ average of 28.0x FY22F earnings, 28.5x FY21F earnings (FY ending Jun 21). SGX also has good cash generating abilities, and is trading at 17x price/operating cash flow, 1 standard deviation below its long-term mean multiple of 20.2x. In addition, SGX has a net cash position of about S$450m, and is well positioned for expansion through further M&As.
  • We opine that any new initiatives (eg SPACs, secondary listings) could potentially rerate SGX to trade closer towards its developed markets counterparts of similar size e.g ASX, Japan Exchange Group. See comparison of SGX's valuation with Nasdac Inq, Cme Group Inc, Hongkong Exchange & Clear, ASX, London Stock Exchange Group & Japan Exchange Group in report attached below.
  • Catalysts to SGX's share price include
    • Secondary listings of foreign listed entities.
    • Longer-than-expected period of trading volatility.
    • M&As.
  • Risks include:
    • competition risk;
    • credit risk from defaults;
    • liquidity risk;
    • technological risks relating to service disruption including cyber attacks;
    • regulatory risk.
  • See the 23-page report attached below for complete analysis on SGX.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-26
SGX Stock Analyst Report BUY INITIATE BUY 12.85 SAME 12.85