SINGAPORE (Mar 5): At a time when several stocks have been downgraded by brokerages, Singapore Exchange (SGX) is still standing strong, and is poised for a good run ahead.
CGS-CIMB has upgraded the stock to an “add” from the previous “hold” recommendation with an unchanged target price of $9.40, representing an upside of 8.0%.
In a Wednesday report, analyst Ngoh Yi Sin opines that SGX is one of the few beneficiaries of market volatility, and appears to be a defensive play amid macro concerns. With a 3.5% dividend yield to its name, the bourse is now CGS-CIMB’s top pick in the financial sector.
For a start, the brokerage remains bullish SGX’s recent acquisition of a 93% stake in Scientific Beta, a smart beta index firm, for 186 million euros ($280 million). Ngoh views this as a move by the group to reorganise its data, connectivity and indices (DCI) segment, as well as its renewed focus to pursue growth opportunities across multiple asset classes.
“With the latest acquisition, SGX could build its index business capabilities to leverage on the global shift towards passive and factor investing,” says Ngoh.
“Its business model of recurring revenue base and low client attrition could also look appealing in the current times,” she adds.
Given its historical 73% compounded annual growth rate (CAGR), Ngoh anticipates a further upside from faster assets under management (AUM) expansion.
“We think jointly-developed indices are in the pipeline (likely in 2QFY2020F), to which a successful launch could also re-rate the stock,” says Ngoh.
To be sure, SGX’s market volume statistics for February delivered greater growth assurance. Its securities daily average value (SDAV) grew 11% and 28% on a month-on-month and year-on-year basis respectively to $1.35 billion, a level last seen 2 years ago.
Market volatility arising from Covid-19 fears also underpinned hedging demand, resulting in a 23% m-o-m and 32% y-o-y surge in the group’s derivatives contracts to 24 million.
“This is now slightly ahead of our monthly projected run-rate for FY2020F and comparable to the average level during 2Q19-1Q20,” notes Ngoh.
“Should these positive trends persist, we see potential upside to our/consensus FY2020F numbers,” she adds.
However, Ngoh notes that the possibility of a launch of MSCI A-share futures by the Hong Kong Exchanges and Clearing Ltd (HKEx) remains a key risk for SGX’s China A50 futures, which constituted some 44% and 17% of its FY2019 derivatives volume and topline figures respectively.
However, Ngoh believes that the impact could be mitigated by the group’s first mover advantage, potential growth in overall market size, as well as the general time taken for new products to build liquidity and traction.
As at 4.02pm, shares in Singapore Exchange are trading at $9.10, indicating a rebound of some 7.2% from Feb 28.
