Analysts are mostly unexcited about the Singapore Exchange Group’s (SGX) S68 results for the FY2023 ended June 30.
On Aug 17, SGX reported earnings of $570.9 million, 26.5% higher y-o-y. Earnings per share (EPS) stood at 53.4 cents for the year.
Revenue rose 8.7% y-o-y to $1.19 billion mainly due to higher derivatives revenue, which grew by 27.2% y-o-y.
Total market turnover value rose by 19% y-o-y to $21.5 billion in July while securities daily average value (SDAV) increased by 14% y-o-y to $1 billion.
Following this, analysts from DBS Group Research, RHB Bank Singapore and UOB Kay Hian have kept their “hold” call on SGX. Maybank’s Thilan Wickramasinghe downgraded his call to “hold” from “buy”. JP Morgan’s analysts have kept their “underweight” call while the analysts at Goldman Sachs have kept their “sell” call. PhillipCapital’s Glenn Thum has kept “buy” on the stock, the only one to do so.
“Currencies & Commodities appear to be a bright spot for SGX, with a strong momentum in derivatives, primarily from iron ore futures and currency futures, as well as OTC FX,” note DBS’s Lim Rui Wen and Tabitha Foo.
“The derivatives business is a growing revenue driver, accounting for approximately half of its current revenue, compared to just 26% in FY2009. Consequently, SGX aims to strengthen its franchise by becoming Asia’s largest one-stop venue for foreign exchange (forex) and retaining its leadership in iron derivatives,” they add.
The analysts have kept their target price at $10.20 as they believe that SGX’s strategic investments in platforms like Trumid, BidFX, Cobalt and Freightos, will help propel SGX to complete its multi-asset strategy if delivered with scale. The moves may also help the exchange in mitigating market cyclicality, they write.
That said, the analysts are concerned about the softening in SGX’s SDAV, which has been known to be a key driver to the exchange’s stock price as it translates into commissions and revenues.
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“While FY2021 was a high base due to increased market volatility, SDAV declined for a second consecutive year in FY23. We believe further downside risks may emerge as we see limited catalysts for trading values to surge in the near-term, given subdued sentiments and investors preferring to stay on the side lines amid uncertainty.
“We maintain our ‘hold’ call as we see no immediate catalysts for the stock. However, we could turn more positive if SDAV stages a meaningful turnaround,” they write.
RHB’s Shekhar Jaiswal has lifted his target price to $10.30 from $9.90 as SGX’s FY2023 results stood slightly ahead of his estimates at 5%.
The analyst has also upped his earnings estimates for the FY2024 by 4%, although noting that the outlook for new IPO listings and cash equities trading volume will likely remain soft, given the uncertain macroeconomic outlook.
“Expectations of an eventual decline in interest rates in 2024 could lead to a dip in treasury income that had supported FY2023 growth. SGX’s forward P/E is close to its historical average, and its yield remains unexciting,” he writes.
SGX could also have paid more dividends with a strong positive free cashflow generation, growing cash balance and net cash position.
“Even with the guidance to deliver a mid-single-digit percentage compound annual growth rate (CAGR) in its dividend per share (DPS) over the medium term, the yield remains below what the market offers,” says Jaiswal.
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At present, SGX lacks near-term catalysts with fixed income, currencies & commodities (FICC) remains the key growth driver for SGX over the forecast years. We expect treasury income to decline in FY2024,” he adds. “With the outlook for IPO listings and equity trading volume likely remaining soft, SGX's share price lacks near-term catalysts. Its forward valuation is fair, and its yield is unexciting.”
UOB Kay Hian’s Llelleythan Tan and Heidi Mo have also upped their target price to $10.46 from $10.28 with SGX’s results slightly above expectations though they remain neutral on the counter due to a lack of near-term catalysts.
“Despite robust growth from FICC segment, we reckon that there are no near-term catalysts to justify a higher valuation. Higher treasury income from interest rate hikes has already started coming through, which we reckon has already been priced in,” they write.
SGX’s full-year dividend also came below Tan and Mo’s expectations.
That said, the analysts have raised their FY2024 to FY2025 earnings forecasts to $545.0 million and $568.4 million from $500.8 million and $531.5 million previously. They have also added their FY2026 estimate at $581.9 million. The higher forecasts are due to the higher FICC volumes and treasury income.
“Despite a subpar yield of about 3%, we like still SGX for its resilient business model that benefits from the global economic uncertainty, but recommend waiting for better entry points,” they note.
Maybank’s Wickramasinghe has lowered his target price to $10.24 in addition to his downgrade as he sees SGX’s medium-term dividend growth compromised by the group’s initiatives to broaden its product offering.
“Near-term risk-return visibility is balanced,” he says. “Post results, we have lowered FY2024 to FY2025 earnings by 2% to 3%.”
JP Morgan’s Harsh Wardhan Modi, Daniel Andrew Tan, Gaurav Khandelwal is unimpressed with SGX given its “low dividend yield spreads, tepid equity volumes and consistent capital accumulation” which “suggests possibility of inorganic growth”. The analysts have kept their target price unchanged at $8.
The analysts at Goldman Sachs are just as unimpressed believing that the exchange’s earnings momentum will weaken moving forward.
This is due to the iron ore monetisation phase not offering a similar upside as seen over the last two years. They also view that the run-rate for treasury income has peaked given the rates backdrop while the derivatives clearing fee rate, which was driven by a mix shift towards more FICC derivative trades, has run its course, according to the team’s modelling. No target price was given.
PhillipCapital’s Thum is the only analyst to remain positive on SGX as he keeps his target price unchanged at $11.71.
“Catalysts include continued growth from derivatives volumes and fees and continued growth in treasury income as the higher interest rates start to kick in,” he writes.
In his report, he likes SGX for its continued development of multi-assets for long-term growth, the group’s strategy in investing for the medium-term as well as rising interest rates which SGX is a beneficiary of.
Shares in SGX closed at $9.44 on Aug 21.
