The Singapore Exchange Group (SGX) S68 has raised its final quarterly dividend to 8.5 cents, up from 8 cents, resulting in a total payout of 32.5 cents for FY2023. This is SGX’s first dividend increase in 12 quarters.
However, some analysts had expected a higher outcome. UOB Kay Hian Research’s Llelleythan Tan and Heidi Mo had raised their target price for the stock from $9.57 to $10.28 on Aug 15, betting that SGX will pay 34 cents for the full year, implying a payout ratio of 78%. At 32.5 cents, the payout ratio was 69%, below the historical ratio of 76% to 88%.
Nevertheless, they raised their target price to $10.46 on Aug 18, citing SGX’s mid-single-digit dividend percentage growth guidance.
RHB Bank Singapore’s Shekhar Jaiswal agrees that SGX could have paid more dividends, given its strong positive free cash flow generation, growing cash balance and net cash position of $306 million — “unless immediate acquisitions are pending”. “Even with the guidance to deliver a mid-single-digit percentage CAGR in its DPS over the medium term, the yield remains below what the market offers.”
DBS Group Research’s Lim Rui Wen and Tabitha Foo expect FY2024 and FY2025 DPS of 34 cents or 8.5 cents per quarter. They have kept their “hold” call and target price of $10.20.
Maybank Securities’ Thilan Wickramasinghe assumes a 5% y-o-y CAGR, translating to a 3.9% average dividend yield for FY2024 to FY2027, below STI’s 5.2%. “Management’s focus on medium-term capital deployment could result in higher dividends in the future, but near-term risk-return visibility is balanced,” writes Wickramasinghe, who has downgraded SGX to “hold” from “buy” and reduced his target price to $10.24 from $10.73.
See also: After 12 quarters, SGX raises quarterly dividend for FY2023
He also lowered his P/E target on SGX’s peers to 21.7 times from 24 times. In contrast, according to Maybank, the Hong Kong Exchanges and Clearing (HKEX) trades around 30.2 times, higher than SGX’s core P/E of 19.4 times for FY2024.
On Aug 16, HKEX reported lower-than-expected earnings growth of 33.9% y-o-y for its 2QFY2023 ended June 30, along with 1HFY2023 DPS of HK$4.50 (78 cents), up 30.4% y-o-y. HKEX pays dividends semi-annually, with a total FY2022 DPS of HK$7.14, implying a 90% payout ratio.
Dividends aside, some analysts are not sufficiently convinced by the upside potential of SGX and have kept their “neutral” or “hold” calls following the FY2023 numbers.
SGX reported adjusted net profit of $502.3 million on Aug 17, up 10.3% y-o-y.
Among seven houses’ reports, PhillipCapital’s Glenn Thum sounded the most optimistic, keeping “buy” in an Aug 21 note with the highest target price of $11.71. Thum’s target price bests that of CGS-CIMB Research analyst Andrea Choong, who upgraded her forecast to $10.60 from $10 previously while staying “hold” on SGX.
In an Aug 17 note, Choong notes that SGX’s core net profit beat her FY2023 forecast by 6%, a feat “largely due to robust treasury income as a result of rising interest rates”, contributing 20% of profit before tax.
Total treasury income, or the interest spread SGX makes between global interest rates and cash deposited by investors to trade, grew by $88.9 million during the year. Treasury income on collateral balances held in trust, net of audit services and other charges stood at $136.9 million at the end of FY2023.
As rate hikes ease, RHB’s Jaiswal sounds a warning. “While we lift FY2024 earnings by 4%, we maintain that the outlook for new IPO listings and cash equities trading volume will likely remain soft, given the uncertain macroeconomic outlook. Expectations of an eventual decline in interest rates in 2024 could lead to a dip in treasury income that had supported FY2023 growth.”
Citing an “unexciting outlook”, he remains “neutral” on SGX but with a higher target price of $10.30 from $9.90 previously.
See also: Derivatives trading supports SGX's earnings; ongoing momentum seen this year
Speaking at the release of the results on Aug 17, SGX’s CEO Loh Boon Chye says his team targets to deliver “high-single-digit” revenue growth and keep expenses — which had increased 7.7% y-o-y to $604.9 million in FY2023 — to a “mid-single-digit” increase in the medium term.
Currencies and commodities shine
According to Choong, the currencies and commodities subsegment remains the key earnings driver for SGX. The overall average fee per contract for equity, currency and commodity derivatives increased to $1.61 from $1.51 the year prior, given a higher proportion of full fee-paying customers.
The over-the-counter foreign exchange (OTC FX) business sustained its strong growth trajectory, notes Choong, with the average daily volumes rising 7% to US$76 billion ($103 billion) in FY2023.
That said, equity derivatives trading volumes remain fairly subdued, says Choong, falling 8.6% y-o-y.
Likewise, UOB Kay Hian’s Tan and Mo point to “weak underlying performance” in equity derivatives. “The underperformance was led by broadbased FY2023 volume declines across most key contracts, such as SGX’s FTSE China A50 Index futures (down 11.0% y-o-y), Japan Nikkei 225 Index futures and options (down 15.9% y-o-y) and FTSE Taiwan Index futures (down 5.8% y-o-y).”
Analysts disagree on the impact of changes to SGX’s Nifty derivatives. Nifty derivatives fully migrated to India’s Gift (Gujarat International Finance TecCity) Connect in July, and SGX says a pro-forma 3% reduction in its derivatives average clearing fees will be replaced with a revenue-share structure with the National Stock Exchange of India (NSE).
The contracts had a notional value of about US$7.5 billion when the switch in the trading venue was made. JP Morgan’s Harsh Wardhan Modi had warned then of a 2% cut to SGX’s earnings following the migration of its second-most traded equity derivative product.
SGX claims it is not economically worse off from the migration as it enlarges the liquidity pool of its product suite. They maintain that Nifty’s open interest remains unaffected at US$9 billion in August.
While the risk of revenue loss to SGX lies in its Nifty customers moving to NSE, CGS-CIMB’s Choong says SGX’s “expansive multi-product ecosystem” counters this option. In her estimates, SGX Nifty comprised 16% of SGX’s total derivatives volumes and accounted for 4% of FY2023 revenue.
Photos: Albert Chua/The Edge Singapore
