SINGAPORE (Feb 13): On Feb 9, the National Stock Exchange of India (NSE), Bombay Exchange (BSE), and Metropolitan Stock Exchange of India (MSEI) announced the end of licensing of their indices and securities, or providing data to foreign exchanges.
This came after the Singapore Exchange (SGX) said in Jan that it would start offering single stock futures (SSFs) benchmarked to Nifty 50 companies, and is part of India’s move to bring trading liquidity back to its home bourses.
See: Singapore Exchange seeks to defuse tensions over National Stock Exchange of India in futures dispute
Goldman Sachs is downgrading its call on SGX to “sell” from “buy” previously with a target price of $6.60.
In a Sunday report, analyst Gurpreet Singh Sahi says that this is likely to cause four pressure points for the stock: Nifty F&O and INR futures revenue loss, lower market data revenues, collateral damage for other derivatives and multiple compression.
SGX Nifty 50 futures & options currently contribute about 7% to the derivative topline in 2017.
Based on commentary from the India exchanges, the licensing agreement with SGX will end in six months from the time notice is given, wherein SGX would have to end the trading/settlement of its India index derivatives contracts.
In addition, that analyst says that SGX’s INR FX futures will be at risk as well, given that much of the INR volume trading came as a hedging tool when trading Nifty 50 futures & options, while FX futures currently account for about 4% of the derivative revenue mix in 2017.
Hence, Sahi sees 10% of derivative revenues directly at risk from both the Nifty 50 and INR products.
“Given that derivatives currently account for about 40% of revenues (25% trading, 15% collateral management), we see a 4% risk to overall revenues.”
Moreover, the impact on bottom line could be twice as much as the top-line impact as SGX runs on about 50% NPAT margin. Hence, Nifty product closure and significant reduction in INR futures volumes is likely to shave off around 8% of SGX’s EPS.
Meanwhile, CIMB is also downgrading its call on SGX to “hold” from “add” previously with a target price of $7.85, as the research house expects near-term share price to be weighed down by uncertainty from the licensing change.
See: SGX shares opens near 7% lower on Nifty futures exit news
In a Monday report, analyst Ngoh Yi Sin says, “While there would not be any material impact on SGX’s FY6/18F earnings (under the agreement with NSE, there will be a notice period of 6 months till Aug 2018 at least), we project potential earnings gap from FY19F onwards as its other new initiatives take time to ramp up.”
According to Ngoh’s scenario analysis, she assumes that the loss of the entire Nifty contribution at various average clearing fees could lead to a potential 2-11% decline in the exchange’s FY19-20 earnings.
However, the analyst reckons that there are possible areas for cost savings from the decrease in trading volumes, while the absence of royalty fees from Nifty products will result in lower royalty costs to NSE.
To mitigate the potential earnings loss, SGX is looking to develop more sustainable solutions with NSE’s International Exchange in Gujarat International Finance Tech City (GIFT), and launch new products.
According to Ngoh, SGX will not be the only exchange affected by the licensing restriction. Other exchanges in Chicago, Dubai and MSCI will also be affected.
“Given India’s 8.4% weighting in MSCI Emerging Markets Index, we suspect there could be greater ramifications, including demand disruption from international funds,” says Ngoh.
As at 10.40am, shares in SGX are trading 9 cents higher at $7.40 or 7.47 times FY18 book with a dividend yield of 3.7%.
