RHB Bank Singapore analyst Shekhar Jaiswal has maintained his “neutral” rating of Singapore Exchange (SGX), with an increased target price of $9.80 from $9.00 previously.
In his report dated May 5, he notes that he has revised his financial model to include half-yearly forecasts, and has increased his FY2023 to FY2025 ending June earnings per share (EPS) by 3% to 5% to account for higher treasury income and one-off income in 1HFY2023.
“We continue to believe that while rising macroeconomic uncertainty helps its derivatives business, it will translate into a weak outlook for SGX’s cash equities business in the near term,” writes Jaiswal.
He adds that depressed market valuations are leading to a rise in delistings and will further delay new listings. “SGX’s forward P/E is close to its historical average, which we believe is a fair valuation level,” says Jaiswal.
The analyst’s revised financial forecasts are based on securities daily average value (SDAV) assumptions of $1.119 billion, $1.175 billion and $1.234 billion for FY2023 to FY2025 and derivatives daily average volume (DDAV) assumptions of $1.05 million, $1.10 million and $1.16 million for the same forecast period.
“We maintain that SGX could continue to see weakness in its cash equities business and maintain our below-consensus SDAV estimates. We have provided our FY2024 earnings and target price sensitivity to the changes in SDAV and DDAV,” says Jaiswal.
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He says he continues to see fixed income, FX and commodities businesses as key growth drivers for SGX over the forecast years, and estimates an 11% revenue compound annual growth rate (CAGR) from FY2022 to FY2025.
For the same period, Jaiswal expects the cash equities business to witness a revenue CAGR of only 1.1%.
“We believe SGX could still explore inorganic growth opportunities in the commodity space. However, if SGX does not undertake any additional acquisitions, we believe there is room for a higher dividend per share (DPS) in FY2024,” he says.
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While Jaiswal says that SGX provides an “unexciting yield” and below consensus earnings, its valuation is “fair”. In line with its dividend policy, he estimates SGX’s full year DPS to remain at 32 cents.
This implies a forward yield of 3.3%, which is well below the Straits Times Index’s (STI) forward yield of 5.1%. His FY2023 to FY2024 profit forecasts for SGX are 6% below consensus.
Meanwhile, the 1-year forward price-to-earnings ratio (P/E) of 21.5x for SGX is in line with its historical average P/E. Jaiswal has rolled forward his valuation basis to FY2024 EPS and now values SGX at 21x P/E, compared to 20x P/E previously.
By these metrics, SGX’s fair value stands at $9.10. However, Jaiswal notes that SGX’s ESG score of 3.4 is four notches above the country median of 3.0. As such, he has applied an 8% ESG premium to SGX’s fair value to arrive at his target price of $9.80.
As at 2.01pm, shares in SGX were trading 12 cents or 1.25% down at $9.47.
