RHB Group Research Shekhar Jaiswal has kept a “neutral” rating on Singapore Exchange (SGX) with an increased target price of $10 from $9.80.
“While we are positive on SGX’s long-term growth prospects from its latest acquisitions and potential pipeline of new listings, we remain concerned about the lack of near-term re-rating catalysts,” says Jaiswal.
The analyst notes that continued global macroeconomic uncertainty could in fact lead to better-than-expected trading volume in the near term. With the recent Russia-Ukraine crisis causing elevated geopolitical tensions, this has in turn created heightened price volatility in global equity markets, with SGX seeing increased trading activity in February 2022.
The securities daily average value (SDAV) increased 21% y-o-y to $1.6 billion, bringing the YTD SDAV to $1.2 billion for FY2022 ending June, in line with the analyst’s FY2022 SDAV estimates of $1.2 billion. SGX’s derivatives segment also saw an uptick in trading activity, with the average daily trading volume (DDAV) of 1.03 million.
In addition, the US Federal Reserve (the Fed) has started the cycle for higher interest rates with a 25 basis points (bps) interest rate hike in the Federal Funds Rate in March 2022. As such, Jaiswal expects another five to six interest rate hikes this year that could create scope for higher treasury income for SGX.
However, some key concerns that Jaiswal observes include firstly, an elevated operating cost profile for FY2022 and secondly, revenue contribution from recent acquisitions that could take time to scale up.
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Next, there appears also to be some risk of elevated competition from Hong Kong Exchange’s MSCI China A50 Connect Index Futures for its FTSE China A50 Index Futures. Lastly, with full induction of Sea Limited into MSCI Singapore, securities market turnover could remain soft as some trading volume could move away from SGX-listed stocks to Sea.
On the other hand, Jaiswal foresees a number of upside risks that include higher-than-estimated SDAV from the potential pipeline of ETFs, REITs, and special purpose acquisition company (SPAC) listings and the aforementioned continued global macroeconomic uncertainty to lead to better-than-expected derivatives volume.
Overall, the analyst views the stock’s valuation as “reasonable” amid modest earnings growth, as it is trading at an FY2022 P/E of 23.4x, above its historical average, while offering a modest yield of 3.3% that is slightly lower than the Straits Times Index's (STI) yield of 4%.
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Shares in SGX are trading at 2 cents higher or 0.2% up at $9.81, at a FY2022 P/B ratio of 7.0x.
Photo: Bloomberg
