Singapore Exchange - OCBC Investment 2021-08-05: Closing FY21 On A Softer Note; Market depth remains a longer term structural concern


Singapore Exchange - Closing FY21 On A Softer Note

  • SGX's FY21 net profit declined 6% y-o-y.
  • 2HFY21 net profit of S$205.6mn declined 20% y-o-y and 14% h-o-h driven by lower revenues as market activities softened.
  • Quarterly dividend of S$0.08/sh was declared, meeting expectations, which brought FY21 dividends to S$0.32 (vs FY20’s S$0.30).
  • Higher cost guided for FY22E as SGX continues to invest on medium term growth initiatives. Valuations look fair while a key concern remains on potential future competition risks to its China FTSE A50 futures trading income.

SGX's FY21 broadly in line

  • SGX (SGX:S68)'s FY21 adjusted net profit of S$447mn fell 6% y-o-y while revenues were comparable to a year ago. Total expenses grew 8% to S$525.2mm due to the consolidated expenses relating to Scientific Beta and BidFX as the company invested in growing its business (excluding this, total expenses fell 4% to S$457.8mm). Adjusted EBITDA of S$623.9mn was down 5% y-o-y.
  • For FY21, both Scientific Beta and BidFX contributed about 7% to SGX's revenues. Should the recently announced MaxxTrader acquisition be added, SGX estimates total revenue contribution from the recently acquired subsidiaries would be above 9%.

Key segmental highlights

  • SGX's FY21 revenues by divisions were
    • FICC + 24% y-o-y (S$212mn, 20% of total revenues).
    • Equities -8% y-o-y (S$701mn, accounts for 68% of total revenues).
    • DCI/market data and connectivity +18% y-o-y (S$143mn, 12% of revenues).

Scrip dividend introduced for FY22, guidance given for 0-3% discount

  • Final quarterly dividend of S$0.08 was maintained, payable on 22 October 2021. This will bring SGX's total dividends in FY21 to S$0.32, an improvement from FY20’s S$0.305. Scrip dividend will be introduced from FY22 onwards (guided for a discount range of 0-3% on scrip dividend), which management clarified was to facilitate reinvestments by investors, as opposed to being a tool to retain capital.

Key updates on recent acquisitions, which should continue to strengthen its capabilities and product/platform offering

  • Scientific Beta’s assets under replication has grown past US$50bn, with a flagship climate index solution (Climate Impact Consistent Index/CICI) launched reflecting innovation beyond smart factor strategies. CICI differs from traditional indices in weighting stocks purely based on their respective climate performance.
  • BidFX has shown strong growth with average daily volume (ADV) growing more than 60% y-o-y to US$43bn. The recently announced (23rd July) acquisition MaxTrader is expected to see the transaction complete in 2QFY22 and should raise SGX’s combined FX franchise ADV to more than US$75bn.

Acquisition of MaxxTrader (excluding transaction costs) should be accretive to SGX’s adjusted earnings from FY22.

  • SGX announced on 23rd July it plans to acquire 100% of MaxxTrader (a single source and direct to market FX trading platform) for US$125mn, to further strengthen its FX OTC reach. A potential US$35mn is to be paid in FY22-23 if performance targets are met. Funding for the transaction will be from external borrowings. The transaction price is set at ~8.3x MaxxTrader’s CY20 revenues. The deal is expected to complete in December 2021 and should be earnings accretive from the first year (excluding one off costs).
  • SGX will acquire the company from FlexTrade Systems, which has expertise in multi asset execution and order management systems. The acquisition should add to its FX OTC reach and complements last year’s acquisition of BidFX.
  • Background information: MaxxTrader is a leading provider of FX pricing and risk solutions for sell-side institutions including banks and broker-dealers, and serves as a multi-dealer platform for hedge funds. The company has a global client and dealer franchise with over 100 global banks, regional banks, broker-dealers and hedge funds currently connected to its platform. Its average daily volume (ADV) has also grown during this time to over US$17 billion.
  • Our view on MaxxTrader: Positive addition which furthers SGX’s multi asset class strategy. MaxxTrader’s sell side client base complements the buy side client reach of BidFX (cloud-based provider of electronic FX trading solutions provider which SGX acquired last year). With this deal, SGX expects its overall FX franchise ADV could rise to more than US$75bn, while its institutional client base could expand to over 200.

Focus ahead

  • Focus ahead will be on executing its recent FICC investments and partnerships (e.g. TrumidXT, Marketnode, Climate Impact X and upcoming ECB – FX electronic communication network), which should enable the company to support clients looking to gain exposure on growing trends that include digitalization and sustainability.
  • As announced previously, SGX will be launching a new global carbon exchange in Singapore by year end, backed by banks DBS and Standard Chartered and Temasek Holdings. The proposed Singapore based exchange and marketplace, Climate Impact X (CIX), aims to launch by year end and will leverage satellite monitoring and blockchain technology to ensure transparency, liquidity and high quality of carbon credits, and is anticipated to benefit over the medium term from its proximity to Southeast Asia and increasing global focus on carbon commitments. CIX’s initial focus is expected to be on natural climate solutions (protection of natural ecosystems-forests, wetlands and mangroves).
  • Higher capex guided for FY22, which should increase to between S$60mn-65mn due to spending related to its near term investments, digitalization, partnership & other growth initiatives.

Fair valuation

Market depth remains a longer term structural concern

  • Market depth remains a longer term structural concern as well, with one new equity listing on SGX and seven delistings in the past month and bond listings remaining as the key contributing source of new fund raising activities, although the company continues to work on initiatives to broaden its future revenue sources. This includes potential partnership with FTSE to open up new opportunities on other index futures products, REIT and ESG related indices, and ongoing plans to deepen its FX and commonities product offering (e.g. KRW and S$ products), building on the customer base from BidFX and its dominant share in INR/US$ and US$/CNH fx futures (estimated market shares of ~65% and 82% respectively as of 1HFY21 results). New ferrous products are also expected to be launched.

SGX - ESG updates

  • SGX is pegged at the top of its industry peers and is incorporated in our fair value via a valuation premium to its historical average multiple. Its ESG rating is driven by a strong governance structure and pegs SGX at the top tier amongst global industry peers. Key positives include ongoing efforts to expand its product suite and market hedging activities expected in a sustained low-rate environment. The solid rating is driven by the firm’s strong governance structure through board oversight and positive track record in productivity and morale issues, which the firm maintains through staff training and employee engagement surveys.
  • SGX’s board has an independent majority, separate CEO and chairman roles, independent chairman and female directors representation. Executive pay is also reviewed independently, with clawback provisions to curtail governance risks. Policies are also in place to pre-empt business malpractices.

SGX - The first Asian exchange to commit to 1.5°C-aligned science-based emission reduction targets –

  • SGX has announced in mid July 2021 its commitment to a 42% reduction in Scope 2 emissions by FY2031 from the base as at FY2021 (July 2020 to June 2021), pledging to set science-based emissions reduction targets that are consistent with keeping global warming to 1.5°C above pre-industrial levels. For Scope 3 emissions, the company will engage its co-location data centre supplier for them to set science-based targets within five years. The commitments are based on the criteria and recommendations of the Science Based Targets initiative (SBTi-collaboration between CDP, UN Global Compact, World Resources Institute/WRI and World Wide Fund for Nature/WWF), making SGX the first Asian exchange to join Race to Zero and Business Ambition for 1.5°C.

SGX will submit its verifiable targets to SBTi for validation.

  • Its Scope 1 emissions(direct emissions from owned/controlled sources) are less than 2% of combined Scope 1 & 2 (indirect from generation of electricity/steam/heating/cooling consumed by reporting company) emissions and are excluded fro targets due to immateriality. Planned initiatives to achieve the Scope 2 reductions include: improving the energy efficiency and reducing the carbon intensity of our data processing requirements in line with best practices, introducing energy-efficient equipment, processes and policies, and; purchasing Renewable Energy Certificates that meet the Scope 2 greenhouse gas (GHG) Protocol quality criteria through its subsidiary Energy Market Company.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-08-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.300 SAME 11.300