SINGAPORE (April 29): OCBC Investment Research is downgrading its call on Singapore Exchange (SGX) to “hold” while lowering its fair value estimate to $7.60 from $7.98 previously, in view of a muted outlook.
Meanwhile, DBS Vickers Securities and CGS-CIMB Research are maintaining their “hold” and “add” calls on the stock with price targets of $7.05 and $7.90, respectively.
This comes after the bourse posted earnings of $99.7 million for 3Q19, down 1% from a year ago on the back of higher expenses of $110.6 million versus $104.4 million in 3Q18. The increase was mainly attributed to higher technology expenses and staff costs due to an enlarged headcount base.
In a report last Friday, OCBC analyst Carmen Lee says she expects SGX’s total expenses to rise even higher to around $121.4 million in 4Q, based on the current full-year operating expense guidance of $45 million in comparison to the 9-month actual total operating expenses of $323.6 million.
“On this basis, we expect this to eat into 4Q projections. While key equity markets indices have generally rebounded in the first four months of the year, we expect sentiment to turn more cautious now that valuations have become more expensive. This will be partly mitigated by volatility in the market which will in turn benefit the derivatives business,” says Lee.
As such, Lee has lowered her valuation from 22 times earnings to 21 times in view of the muted outlook.
On the other hand, DBS analyst Lim Rui Wen sees no visible catalysts for SGX with potential earnings downside should it face competition from the Hong Kong Stock Exchange (HKEX), which recently announced plans to launch futures contracts.
These may compete with SGX’s FTSE China A50 Index Futures, says Lim, which account for about 40% of the bourse’s total derivatives volume.
“Our earnings are lower than consensus by 4/3% for FY20F/FY21F as we have lower growth assumptions (c.7% y-o-y) for derivatives contracts post FY19F. We have yet to input potential market share loss to HKEX’s MSCI China A Index futures in our numbers,” comments Lim.
Nonetheless, the analyst says the impact of HKEX’s product launch may not be as dire should market growth be buoyant for additional players.
“We believe [SGX’s] share price should find support from its absolute dividends of 30 cents/year, implying a c.4% yield,” she adds.
Contrary to OCBC and DBS’s views, CGS-CIMB analyst Ngoh Yi Sin believes market pessimism, including concerns over competition from the HKEX, has already been more than priced in.
This is given the heavier weightage of Chinese shares in MSCI global benchmarks which will grow market size and liquidity, even for SGX’s China A50 futures, in Ngoh’s opinion.
“Any new product will take at least 2-3 years to ramp up, and SGX’s first-mover edge and extensive offering have developed a sticky customer base. We think increasing clarity on product specifications and Nifty resolution could ease the overhang on the stock,” says Ngoh.
“We raise FY19-21F EPS by 0.1-2.9% on higher derivatives volume and collateral management income… Potential catalysts are tighter cost discipline and improving market sentiment. Downside risks: intensifying competition and unfavourable regulatory changes,” she adds.
As at 11.07am, shares in SGX are trading 2 cents lower at $7.38 or 6.79 times Jun 19F book value.
