SGX - OCBC Investment 2022-02-07: 1H FY022 Largely In Line


SGX - 1H FY022 Largely In Line

  • Stable top line growth with improved unit average fees for derivatives, which was achieved despite increased China A50 contract competition, and softer equity turnover and derivative volumes.
  • SGX’s China A50 contract volumes appear to be stabilizing with estimated market share of ~84%, a positive given this was achieved without price cuts and likely supported by the strength of its product suite across different asset classes.
  • Fair value estimate for SGX is lifted to S$10.40. SGX remains focused on its strategy to advance its multi-asset exchange platform, widen its partnership network and grow its international presence, with the goal to increase diversification of its revenues over the medium term.

SGX's 1HFY2022 results were largely in line, no scrip dividend in FY22

  • SGX (SGX:S68)'s 1HFY2022 revenues of S$522mil was stable from a year ago (+0.2% y-o-y) while group NPAT of S$219mil declined 9% y-o-y. Dividend of 16cts/share was in line, with guidance that scrip dividend will not be introduced in FY2022, a positive given previous share price reaction.
  • Adjusting for non-cash and non-recurring items, SGX's adjusted revenues and group NPAT of S$501mil and S$222mil gained 6% and fell 3% respectively. Recent bolt-on acquisitions (Scientific Beta and BidFX) accounted for about 8% of revenues with lower margins (38% vs group blended margin of ~59% for 1H).
  • Adjusted NPAT included S$16.7mil net re-measurement gain on BidFX a year ago, and S$5mil writeback of earnout contingent consideration for BidFX in 1H.

FICC and DCI accounted for ~36% of overall topline.

  • SGX's 1HFY2022 SDAV declined 7% y-o-y, with strength in FICC (+15% y-o-y) helping to offset weaker performance in equities. Average fees per contract for equity, currency and commodity derivatives rose 19% from a year ago to S$1.27 with higher proportion of full fee paying clients and some rollback of discounts provided, while average securities clearing fee fell 4% to 2.6bps. Total traded value of cash equities declined 7% to ~S$150bn on lower trading activities.
  • Treasury income was impacted negatively due to lower yields (pressure looks likely to continue this year), although the pace of treasury income decline slowed in 1H FY2022 (~S$21mil, versus 2HFY2021’s S$26mil and 1HFY2021’s S$48mil).

Expenses was up 6% to S$262mil, largely driven by staff and technology costs.

  • Adjusted total expenses excluding BidFX and Scientific Beta (SB) would have increased 5% to S$227mil. 1H2022 EBITDA margins fell 3 ppt to 59%, with combined EBITDA margin for SB and BidFX improving from 37% to 38%.
  • SGX's management retained expense guidance for the year even with the inclusion of MaxxTrader (previous guidance excluding MaxxTrader was S$565- 575mil). Expected 2022 expenses after stripping out MaxxTrader is expected to be S$13mil lower than previously expected, reflecting disciplined cost management despite inflationary pressures. MaxxTrader acquisition was completed in January 2022 and is expected to contribute about S$25mil to opex yearly.
  • Overall, SGX's management expects FY2022 expense to be stable or marginally higher versus FY2020. Management observed that BidFX’s performance so far has exceeded expectations at the point of acquisition.
  • Over the past two years, SGX has made close to S$1bn of acquisitions and investments, with growth investments held at fross carrying value of S$0.55/share (or about S$600mil). Gross debt/ebitda ratio ~1.4x (increased from 0.9x in FY2021), with further headroom towards 2x.

China A50 contract volumes appears to be stabilizing

  • While still evolving, SGX’s China A50 contract volumes appears to be stabilizing with estimated market share of ~84%, which was achieved without price cuts and likely supported by the strength of its product suite across different asset classes.
  • A key encouraging observation is that this was achieved despite SGX not reducing contract pricing (SGX fee is ~2x that of HKEx). In addition, with higher open interest (OI) in SGX FTSE China A50 and HKEx benchmark China OI since October 2021, the overall market appears to have expanded.
  • Our view remains that while some concerns remain from the increased competition from HKEx’s A50 product (launched from 18th October 2021), the overall market should continue to grow over time. SGX is also expected to continue mitigating the impact from ongoing efforts to diversify its revenue mix and growth drivers.

Fair value for SGX is lifted to S$10.40

  • Fair value estimate for SGX is lifted to S$10.40 implying 22.6x forward PER (close to +1 standard deviation to its 10Y historical average multiple).
  • Looking ahead, the firm remains focused on executing its core strategies to advance its multi-asset exchange platform, widen its partnerships and network and grow its international presence, which bodes positively for future earnings stream.
  • SGX remains focused on building up its non-equity business (FICC and DCI) to diversify its portfolio. Foreign exchange business will be one of the company’s key growth drivers, following the acquisition of BidFX (multi-dealer streaming platform), Maxxtrader (complements BidFX with its direct streaming capabilities) and establishment of ECN (introducing anonymous pools of trading). It is currently a meaningful player in the bond market, and plans to continue to form partnerships (be it contracts jointly traded/connects etc) and to expand its international presence to up-sell to existing clients or expand its client base.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-02-07
SGX Stock Analyst Report BUY UPGRADE HOLD 10.40 UP 10.200