Singapore Exchange - UOB Kay Hian 2021-07-13: Trading Momentum Eases; Growth Plans Are Set In Place.


Singapore Exchange - Trading Momentum Eases; Growth Plans Are Set In Place.

  • SGX saw slight easing of trading velocity in Jun 21, though volumes remain elevated above pre-pandemic levels. Hedging continues to be in demand as total open interest in futures increased 2.2% m-o-m. The group continues to outline its growth plans, through potential acquisitions as well as development of new market opportunities.
  • Maintain BUY call on SGX with a target price of S$12.35.

Easing of trading velocity in Jun 21...

  • SGX (SGX:S68) reported trading statistics for Jun 21.
  • Total securities turnover in Jun 21 dropped 11% m-o-m, while daily average value slipped to S$1.22b (-29% y-o-y, -23% m-o-m). Jun 21 saw trading volumes trend lower, though we note that it is still at a higher level compared to pre-pandemic levels.
  • Total trading volume for derivatives in Jun 21 rose 5% m-o-m, though daily average volume decreased slightly (-6% y-o-y, -7% m-o-m). Total monthly increase in derivatives was supported by FTSE China A50 index futures, which rose 15% y-o-y and 14% m-o-m as risk management demand increased.

… though forex and commodity hedging continue to show an increment.

  • SGX's Forex daily contracts traded increased steadily (+10% y-o-y, +1% m-o-m). Open interest in several forex contracts achieved daily record highs, reflecting strong institutional demand to manage currency risk in Asia’s key economies.
  • Commodity derivatives trading volume was resilient (+9% y-o-y, -5 m-o-m). Overall, total open interest in futures continued to trend up (+2.2% m-o-m)

Still solidly tracking expectations.

  • SGX's FY21 trading volumes were consistent with our expectations. Securities daily average value traded of S$1.35b was in line with our expectations of S$1.33b, while equity index futures volume of 172m was likewise similar to our expectations of 174m. Looking forward, we expect derivatives to continue to trend upwards given the increased hedging needs.
  • Opportunities for growth. Separately, the group continues to outline its strategy to acquire, build and partner for growth. Revenue CAGR in the medium term is expected to be in the mid-high single digit. One area of growth is in forex, where the group’s forex volumes continue to show a steady growth. SGX has highlighted the increasing usage of multi dealer platforms and electronic communication network (ECN) in the OTC markets. As such, the group is looking to set up an OTC electronic communication network anchored in Singapore, building an integrated forex offering which combines both forex futures and OTC forex offerings. Currently, we have built in a 9% revenue CAGR from FY20-23F for the group’s forex volume traded.
  • Acquisition prospects. SGX has also highlighted considerations for prospective acquisitions. These include a strategic fit to gain capabilities in SGX’s current offerings, allowing the group to expand into fast growing business segments. Such segments would have a 3-year pro forma revenue CAGR of >10%, allowing for cash accretion within three years.

Earnings revision & risks

  • None. We forecast that SGX will generate revenue of S$572m in 2HFY21 (-0.3% h-o-h, -0.3% y-o-y), with adjusted net profit of S$235m (+3% h-o-h, -8% y-o-y), off a high base in 2HFY20. The aspect to watch out for would be contribution from the group’s Data, Connectivity and Indices segment which should see an increased contribution from its acquisition of Scientific Beta.

SGX - Valuation & Recommendation

  • Maintain BUY with a target price of S$12.35. Our target price is pegged to peers’ average of 28.0x FY22F earnings. SGX has a net cash position of about S$450m, and is well positioned for expansion through further M&As.
  • See
  • We opine that any new initiatives (eg SPACs, secondary listings) could potentially re-rate SGX to trade closer towards its developed markets counterparts of similar size (eg ASX, Japan Exchange Group).
  • Catalyst to SGX's share price
    • Secondary listings of foreign listed entities.
    • Longer-than-expected period of trading volatility.
    • M&As.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-13
SGX Stock Analyst Report BUY MAINTAIN BUY 12.350 SAME 12.350