SINGAPORE (Sept 27): Goldman Sachs is upgrading Singapore Exchange to “buy” from “neutral” with a target price of $8.50 given improving volume and earnings outlook.
In a Tuesday report, analyst Gurpreet Singh Sahi says that SGX has underperformed its peers and the Straits Times index year to date after earnings expectations were revised downwards.
But Sahi expects earnings cuts to come to an end and volume recovery will prompt upward revisions to consensus.
Better volumes outlook will be supported by cash equity turnover velocity which has stayed low at SGX and globally, due to rising price levels. This however caused SGX to underperform as volumes lagged index rises.
However, the analyst believes that with Fed tightening, half of the SGX cash market volumes could be subject to more volatility and hence could have higher velocity.
On SGX’s derivatives side, the index levels are at all-time highs but volatility is depressed. Such periods are followed by higher volatility, helping derivatives volumes.
“We estimate about 10% increase in volumes in either cash equity or in aggregate derivative market could translate into 7% EPS upside,” says Sahi.
After a four-year pause, dividend growth should restart. Earnings growth could bring payout ratios to the minimum level of 80% set by management thereby re-starting DPS growth this financial year.
The analyst notes that underappreciated efforts from management could also help improve volumes although these are not priced in.
As at 12.47pm, shares in SGX are trading 14 cents higher at $7.45 or 20 times CY18 earnings with a dividend yield of 4%.
