UOB Kay Hian analyst Llelleythan Tan has downgraded his recommendation on Singapore Exchange (SGX) to “hold” with a lower target price of $10.04 from $10.85.
According to the analyst, the downgrade comes due to the lack of near-term catalysts to justify a higher valuation for the stock.
The lower target price is also based on a lower P/E of 22.2x based on SGX’s FY2023 earnings estimates, down from the previous P/E peg of 23.5x.
“Higher treasury income from interest rate hikes is expected to start from 2HFY2023, which we reckon has already been priced in,” he writes.
“With a moderate yield of about 3%, we like still SGX for its resilient business model that benefits from global economic uncertainty, but recommend waiting for better entry points,” he adds.
Tan’s report dated Sept 15 comes after SGX reported total securities market value of $24.32 billion in August, down 7.4% y-o-y.
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During the month, the exchange’s performance was “largely in line” even as it saw a drag from equity derivatives.
During the month, the exchange’s securities daily average value (SDAV) fell by 11.6% y-o-y to $1.11 billion, continuing its downward momentum.
At the same time, SGX’s derivatives daily average volume (DDAV) rose slightly at 2% y-o-y but fell 6.6% m-o-m to 921,170 contracts, driven by uncertainty over China’s economic outlook and the Fed’s unprecedented interest rate hikes.
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On the other hand, foreign exchange (forex) and commodities surged, coming in line with Tan’s expectations.
Further to his report, Tan is positive on SGX’s new partnership with the New York Stock Exchange (NYSE), which was announced in July.
The exchange is also a potential beneficiary of the heightened geopolitical tensions that have seen US-listed Chinese companies facing increased regulatory scrutiny and delisting risks due to disagreements with audit access requirements.
“Although regulators from both sides have recently signed an agreement to increase cooperation, we reckon alternative listing venues such as SGX would see increased demand as potential Chinese issuers shun the US capital markets,” says Tan. “The recent listing of Shanghai-based electric vehicle firm NIO Inc (NIO) on SGX is a good start for the bourse.”
On the prospect of the three US-listed companies headquartered in Singapore, Tan sees that a homecoming dual listing from Sea Limited would have the most impact for SGX, albeit insignificant.
The analyst notes that Sea is currently trading at a year-to-date (ytd) SDAV of about $1.2 billion on the NYSE, similar to the overall combined SDAV on the SGX for the FY2022.
“Assuming that Sea trades at the same SDAV of around $1.2 billion on the SGX, our FY2023 net profit and P/E-based target price would increase by 22% due to higher trading and clearing revenue based on our estimates,” says Tan.
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Nio, which has secondary listings on the SGX and the Stock Exchange of Hong Kong (HKEX), trades at a ytd SGX on the SGX at around $5 million. The sum is about 0.3% of what Nio trades on the NYSE at around $1.7 billion, the analyst points out.
“Due to lower trading liquidity on the SGX, we estimate that SDAV for Sea on the SGX would be around 5% of the NYSE. If so, our new FY2023 net profit estimate and P/E-based target price would only increase by 1%,” he adds.
Despite the downgrade and lower target price estimate, Tan has kept his earnings forecasts unchanged for now.
As at 12.29pm, shares in SGX are trading 4 cents lower or 0.41% down at $9.61.
