While Singapore Exchange’s (SGX) 1HFY2022 results mostly met expectations, analysts note low treasury income and weaker cash equities for the period.
Citi Research analysts Robert Kong and Tan Yong Hong issued the biggest rerating. In a Feb 7 note, Kong and Tan upgrade SGX to “buy” from “sell”, with an increased target price of $10.50 from $9.
For them, the “key positive” in the earnings report was the sequential improvement in unit average derivatives fees which have continued to rise despite new competition.
Specifically, the Citi analysts were referring to the trading of SGX’s China A50 contracts, which, since last October, is being offered by Hong Kong as well. Instead of a rapid loss of market share, Hong Kong’s piece of the overall pie for this product has stabilised at around 16%. “This is despite SGX not cutting contract pricing and indeed pricing has improved,” note the Citi analysts.
Nevertheless, they point out that the results were characterised by relatively muted cash equities turnover and derivative contract volumes while treasury income was also soft due to the low rates backdrop.
For the 1HFY2022 ended Dec 2021, SGX reported earnings of $219 million, down 8% y-o-y; adjusted earnings, which SGX claims is a more accurate reflection of its underlying earnings, was down 2% y-o-y.
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Revenues of $522 million were flat y-o-y with higher operating expenses of $262 million, up 6% y-o-y, and operating profit of $260 million, down 7% y-o-y.
Another notable rerating comes from Maybank Research analyst Thilan Wickramasinghe, who upgrades SGX to “buy” from “hold”. Owing to the weaker treasury earnings and lower peer multiples, however, he lowers his target price to $11.20 from $12.27.
The “weaker than expected” treasury income typically contributes around 9% of revenues, but was just a third of that in 1HFY2022. “Lower yields were to blame and re-pricing could take six to nine months despite higher rate expectations going forward, according to SGX,” writes Wickramasinghe in a Feb 6 note.
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He adds: “SGX’s 1HFY2022 profit after tax (PAT) missed Maybank’s expectations, but was in-line with [the] street. The group’s derivatives, foreign exchange (forex) and commodities segments are delivering growth. Rising global uncertainty from rate hikes, Chinese domestic policy, inflation as well as regional reopening should drive upside to volumes for SGX’s risk management solutions going forward, in our view.”
Despite a competing product on the China A50 index futures introduced by the Stock Exchange of Hong Kong in October, income here expanded 10% between October and December, according to SGX. This signifies the group’s strong risk management offering, writes Wickramasinghe.
OCBC Investment Research is recommending "buy" on SGX with a higher target price of $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," writes its research team in a Feb 7 note.
Conversely, UOB Kay Hian Research analyst Llelleythan Tan is maintaining "hold" on SGX with a lower target price of $9.09 from $9.74 previously. While 1HFY2022 earnings came in within Tan's expectations, the results were nonetheless "muted", he writes in a Feb 8 note. "Although SGX’s underlying businesses are stable and growing, we do not see any near-term catalysts to justify a re-rating."
Other analysts maintain ratings
The most recent set of results show that SGX is “steadying the ship”, writes CGS-CIMB Research analyst Andrea Choong, who issued a similarly stable rating. In a Feb 5 note, Choong is maintaining “add” on the counter with an unchanged target price of $10.40.
Choong notes that SGX’s EBITDA margin slid 3 percentage points y-o-y to 59% on the back of staff costs as subsidiaries Scientific Beta and BidFX gain scale. The acquisition of forex trading platform MaxxTrader was completed in January. At full speed, this could raise forex ADV by between 20%-25%, writes Choong.
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Collectively, revenue from Scientific Beta and BidFX rose 20% y-o-y to $40 million in 1HFY2022, accounting for 8% of SGX’s total revenue.
Choong writes: “We expect earnings upside to come from Scientific Beta, BidFX and MaxxTrader as they gain scale. Market volatility should also bode well for SGX’s derivatives segment.”
Similarly, Jefferies Research analyst Krishna Guha is maintaining both his “buy” rating on SGX and his target price of $10.80.
“Notwithstanding the profit decline, we think fundamentals will improve in 2HFY2022 and beyond. Spacs/new listings should boost cash average daily trading volume (ADV). Higher rates would help treasury incomeI while SGX continues to demonstrate leadership in derivatives. SGX is gaining market share in FX, which in turn should improve efficiencies and margins,” writes Guha in a Feb 7 note.
Cautious outlook
While both DBS Group Research and RHB Group Research analysts maintain their ratings and target prices for SGX, they highlight a few drags on performance ahead.
While DBS Group Research analyst Lim Rui Wen recommends investors “hold” SGX for a target price of $10.20, RHB Group Research analyst Shekhar Jaiswal remains “neutral” on SGX with an unchanged target price of $9.80.
Writes Lim: “We remain more conservative on our earnings estimates, bearing in mind that preceding years saw good traction in equities and derivatives due to heightened market volatility.”
Jaiswal notes a few key near-term risks. Firstly, SGX has flagged that operating costs will continue to increase within the current FY2022. “We believe revenue contribution from recently-acquired businesses could take time to scale up.”
Next, while SGX remains confident of market size expansion for its FTSE China A50 Index Futures, Jaiwal foresees the risk of elevated competition from Hong Kong Exchange’s MSCI China A50 Connect Index Futures.
Also, with the full induction of home-grown gaming and ecommerce giant Sea as a component stock of MSCI Singapore in 1Q2022, there is a risk that securities turnover, already soft for 1HFY2022, could moderate further. This is because investors sticking closely to Singapore market indexes are compelled to allocate more weightage to New York-listed Sea and less towards SGX-listed counters.
As at 11am, shares in SGX are trading 48 cents higher, or 5.1% up, at $9.88.
Photo: Bloomberg
