SINGAPORE (Nov 22): Phillip Capital is maintaining its “accumulate” call on Singapore Exchange (SGX) with a target price of $8.31.
This came despite the Stock Exchange of Hong Kong (SEHK) announcing it will start offering trading in iron ore futures contracts, as the research house believes SEHK does not pose as a threat to SGX.
See: Hong Kong vs Singapore; who will win the iron ore wars?
In a Tuesday report, analyst Jeremy Teong says, “SGX will remain a dominant venue for iron ore trading because of its well-entrenched position in offering a comprehensive range of iron ore related bulk products.”
SGX also has Forward Freight Agreements (FFA) that will allow downstream steel downstream steel industry participants to manage upstream volatility.
According to Teong, the creation of an iron ore complex that includes coking coal and FFA was built over time and not a “plug and play” platform.
To recap, SGX acquired the Baltic Exchange in Sept 2016 when the synergies between FFA and iron ore were not obvious as global trade was weak.
See: SGX to offer $137 mil for Baltic Exchange
On hindsight, the purchase of the Baltic Exchange was an early-stage strategy to create a credible product that would stack well with the iron ore ecosystem and enhance SGX’s competitive moat.
“So we believe SGX’s insights in this area of the derivatives business places it ahead of its competitors,” says Teong.
In addition, SGX’s block market is open to both inter-dealer brokers (IDB) and clearing members. IDBs will help SGX facilitate over-the-counter (OTC) trading which makes up 90% of all iron ore transactions on SGX.
SGX not only has strong OTC trading activities, it has a long dated open interest stretching up to Dec 2020, with a maximum contract months of four calendar years and the open interests’ forward curve stretches out to about three calendar years from Nov 2017, which is critical for ample liquidity, competitive bid-ask spread and pricing discovery.
In contrast, SEHK only has a maximum contract months of two calendar years and open interests’ forward curve that stretches out to two contract months.
Furthermore, SGX’s trading sessions run from 7.25am to 8pm with an overnight session that runs through 4.45am.
The overnight session that allows US and Europe clients to continue clearing after Asian hours, accounts for about 20% of total volumes.
On the other hand, SEHK’s trading session only runs up to 1am at the latest.
As at 12.20pm, shares in SGX are trading at $7.53 or 8.2 times FY17 book with a dividend yield of 3.7%.
