Analysts are split on the Singapore Exchange’s (SGX) latest set of results, as weakness in equities trading and an expanded multi-asset strategy earned the bourse both upgrades and downgrades.
In FY2022 ended June, SGX’s equities revenue fell slightly to account for 64% of total revenue, down from 66% in FY2021. Conversely, SGX’s fixed income, currencies and commodities (FICC) revenues increased to account for 23% of total revenue in FY2022, up from 20% in FY2021.
In an Aug 19 note, PhillipCapital Research analyst Glenn Thum upgrades SGX to “buy” from “accumulate” with a higher target price of $11.71.
“FY2022 revenue of $1.1 billion was slightly below our estimates, at 94% of FY2022F, while earnings of $452 million met our estimates, at 99% of our FY2022F,” writes Thum. “Variance came from lower-than-expected equity revenue due to lower treasury income.”
Meanwhile, Citi Research analyst Tian Yafei maintains “buy” on SGX with a raised target price of $11.24 from $11 previously.
SGX acts as a proxy to the Singapore market, writes Tian in an Aug 19 note. “Upside could come from an improved economic outlook, while further news of slowdown may imply further downside.”
See also: SGX maintains FY2022 earnings and dividend, claims 'natural right' to offer listing services
Tian thinks a cross-border exchange mergers and acquisitions (M&A) in Asia is “unlikely”, but SGX is considering “bolt-on” acquisitions that are additive to and can enhance their core business and drive their strategic priorities.
SGX has liquid assets exceeding $700 million, notes Tian, but perhaps around half of that is committed funds. “While SGX is debt-free, in Oct 2019, SGX launched a multicurrency debt program which gives capacity of up to $1.5 billion to fund potential acquisitions.”
Likewise, UOB Kay Hian Research analyst Llelleythan Tan is maintaining “buy” on SGX but with a lower target price of $10.85 from $11.09 previously.
See also: Test debug host entity
“With higher interest rates, we expect SGX’s margins to expand in FY2023 as treasury income starts to recover. However, rising cost pressures may start to weigh on margins,” writes Tan in an Aug 19 note.
Tan adds: “As SGX is currently trading below its historical mean, we reckon that there is some upside at current price levels. Robust contributions from FICC and equity derivatives are set to continue in FY2023 due to volatile macroeconomic conditions whilst higher treasury income from interest rate hikes is expected to start from 2HFY2023. With a moderate yield of 3%, we like SGX for its resilient business model that benefits from global economic uncertainty.”
CGS-CIMB downgrades SGX
On the other hand, CGS-CIMB Research analyst Andrea Choong is unimpressed by SGX’s results, downgrading the bourse to “hold” from “add” with an unchanged target price of $10.40.
SGX’s treasury income fell sharply to $28.6 million in FY2022 from $57.5 million in FY2021. Treasury income is the interest spread that SGX makes between global market interest rates, and cash deposited by investors to trade.
In an Aug 19 note, Choong notes that a recovery of treasury income will likely drive sequential earnings growth, but she thinks this is priced in. “ Notably, treasury income had improved on a h-o-h basis on the back of higher interest rates, although this figure was still comparatively weak y-o-y.”
DBS issues lowest TP
For more stories about where money flows, click here for Capital Section
Likewise, DBS Group Research and OCBC Investment Research are also maintaining “hold” on SGX with target prices of $10.20 and $10.40 respectively.
DBS analysts Lim Rui Wen and Tabitha Foo have issued the lowest target price among research houses mentioned here. “While SGX saw good contributions from all business segments in the last two years, including from equities and FICC, on the back of heightened market volatility, we maintain our hold call, as we believe there are no immediate catalysts for the stock, with the mixed performance of FY2022 equities and derivative volumes.”
Lim and Foo also point to increased competition. “SGX’s FTSE China A50 Index futures, which used to be the only offshore China A50 futures index, accounting for 42% of SGX’s total derivatives in terms of volume, now sees competition from HKEx's MSCI China A50 Connect Index futures, which are gaining market share. Should HKEx’s MSCI continue to gain market share, there is a potential earnings risk for SGX as well.”
Finally, RHB Group Research analyst Shekhar Jaiswal is maintaining “neutral” on SGX with a lower target price of $10.30 from $10.70 previously. This includes an 8% ESG premium over RHB’s fair value of $9.50.
SGX is guiding for 7%- 9% growth in total expenses for FY2023, of which 2% growth will come from the full year impact of the MaxxTrader acquisition, says Jaiswal. “Much of the other increase in costs will come from higher expenses from the buildout of its OTC FX business and higher staff costs from salary increments. SGX expects expenses to grow at mid-single digit during the medium term.”
SGX’s valuation is reasonable, he adds. “Accounting for higher operating costs and a likely muted securities daily average value (SDAV) in FY2023F, we lower FY2023F-FY2024F earnings by 3%-4% each.”
SGX’s FY2023 P/E of 22.7x is now slightly above its historical average of 21.9x, writes Jaiswal. “With no visibility of a higher dividend payout, the stock offers a modest yield of 3.2% as compared to Singapore’s market yield of more than 4%.”
As at 10.48am, shares in SGX are trading 10 cents lower, or 0.99% down, at $9.91
