SINGAPORE (June 25): RHB analyst Leng Seng Choon has upgraded its call on Singapore Exchange SGX from “neutral” to “buy” over strong securities average daily value (SADV), which it raised by 15% to $1.32 billion in FY21.
Volatility arising from market volatility, he says, could lead to heightened trading volumes going forward.
A robust 4Q20 trading volume prompted Leng’s bullishness on SGX, with SADV coming in at $1.57 billion as at June 3. The first three weeks of June similarly came in even higher at $1.86 billion, far exceeding initial predictions of $1.29 billion stemming from weakness for 1HFY20.
“Gradual resumption of economic activities is expected to contribute to more volatility and hence increase the trading of equities,” says Leng, as phase 2 lockdown measures came into effect this month.
Nevertheless, Leng sees derivative trades slowing in FY21 due to a reduction in license agreements with MSCI from February next year. Affected contracts account for about 15% of equity derivatives average daily contracts (DADC) and 12% of total DADC (including currencies and commodities). Fortunately, the partnership on MSCI Singapore Index products will remain.
Still, stronger profits are expected in FY21, with Leng increasing net profit prediction by 6% to $415 million on the back of higher FY21 SADV. Nevertheless, this is still lower y-o-y due to an expected y-o-y fall in DADC. Value investors will appreciate, however, a robust dividend yield of 4.5% with a FY20 Distribution per Share (DPS) of 36 cents a share based on an 85% payout ratio, though FY21 is likely to see the dividend reduced to 33 cents per share.
A strong sign of Leng’s confidence is that he has raised SGX’s target price from $8.60 to $9.20 with a robust 15% upside. Arguing that a sharp 19% one-month decline in SGX’s share price has already factored in the loss of MSCI contracts, Leng is optimistic about SGX’s net cash position and continued monopoly status on the trading of Singapore stocks. He believes that downsides are limited.
Nevertheless, the RHB analyst warns that global economic fluctuations and geopolitical developments remain a risk on stock performance. A longer than expected Covid-19 performance could also see trading volumes slowly dip from present highs.
As at 3.10pm, SGX is trading 0.07 points down at $8.03. Price-to-earnings ratio stands now at 18.99 and dividend yield is coming in at 3.74%.
