Singapore Exchange - UOB Kay Hian 2022-06-08: Strong Monthly Performance As Trading Volatility Remains Elevated

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Strong Monthly Performance As Trading Volatility Remains Elevated

In Apr 22, SGX saw sustained growth in DDAV as trading volumes for both equity-linked and forex derivatives rose, driven by uncertainty caused by the Ukraine-Russia conflict. SDAV continued its downtrend while commodity volumes normalised from recent monthly highs.
Upcoming interest rate hikes are expected to suppress SDAV while boosting interest income.
In our view, SGX remains fairly valued at current price levels, with limited upside. Maintain HOLD.

Despite the benchmark STI Index being the strongest performing developed-market benchmark globally for 4M22, SGX (SGX:S68)'s securities daily average volume (SDAV) continued its decline in Apr 22 to S$1.3b (-1.1% y-o-y, -18.2% m-o-m). The lower m-o-m performance could be attributed to three fewer trading days in Apr 22 and coming off monthly highs in Mar 22.

SGX's derivatives daily average volume (DDAV) surged to 1.1m contracts in Apr 22 (+25.1% y-o-y, -6.5% m-o-m), driven by uncertainty from the ongoing Ukraine-Russia conflict.
On 26 April, DDAV rose to an all-time high of almost 3m contracts. Total equity index futures surged (+23.3% y-o-y, -17.8% m-o-m) while FTSE China A50 Index volumes skyrocketed (+37.3% y-o-y, -17.9% m-o-m) as SGX’s commanding market share continued to hold up well against HKEX’s MSCI China A50 Index futures.
Other equity index futures such as FTSE Taiwan Index (+7.4% y-o-y, -11.5% m-o-m) and FTSE Nifty 50 Index (+14.5% y-o-y, -9.3% m-o-m) also outperformed.

SGX's total forex futures volumes grew 27.0% y-o-y, the highest since Mar 21 as both INR/US$ futures (+8.6% y-o-y, +2.3% m-o-m) and US$/CNH futures (+58.0% y-o-y, -0.8% m-o-m) surged with the latter increase being attributable to the increasing adoption of CNH as a safe haven currency.
SGX's total commodity derivatives volumes softened m-o-m as market volatility normalised from recent monthly highs but was largely stable y-o-y. Iron ore futures (+3.4% y-o-y, -49.0% m-o-m) climbed while forward freight agreement softened (-16.9% y-o-y, -41.6% m-o-m) amid macro uncertainties.

Facing record-high inflation, the Fed has indicated multiple upcoming interest rate hikes for the upcoming Jun/Jul 22 Fed meetings. Looking back, periods of high inflation and corresponding interest rate hikes have historically supressed SDAV levels as investors anticipated lower corporate earnings, forming a SDAV floor at around S$1b post-hikes.
As of end-Apr 22, SGX's SDAV is currently at S$1.25b, implying that we expect a 15-20% drop in SDAV levels before seeing any potential rebound in trading activity. This is in line with our expectations as we had already expected SDAV to soften from elevated levels in Feb 22 and Mar 22 (1Q22), driven by the Ukraine-Russia conflict. Thus, as the cash equities segment historically accounts for 35-40% of SGX’s annual revenue, we expect revenue from this segment to moderate going forward, and drag down SGX's overall revenue and earnings.

In May 22, the Fed raised the benchmark interest rate by 50bp to curb record-high inflation. As rates increase, we expect higher treasury income to follow suit and there should be a significant boost some time in 2HFY23/1HFY24, given that there is usually a lag of 6-9 months.

No changes to earnings estimates trade at levels similar to peers’ average (28.6x).
See
Key catalysts:
- Secondary listings of foreign listed entities.
- Longer-than-expected period of trading volatility.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-08

SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.330 SAME 9.330