Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


Singapore Exchange - Derivatives Powers On

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  • SGX achieved revenue of S$910m (+7.7% y-o-y) in FY19 - a record since listing.
  • Strong derivatives offsets declining equities revenue.
  • Declared final DPS of S$0.075; share price well-supported by dividend yield of 3.8%.
  • Upgrade to BUY, Target Price raised to S$8.30.

Pursuing Growth and Scale as a Multi-asset Exchange

  • We believe SINGAPORE EXCHANGE LIMITED (SGX:S68) will continue to benefit from strong demand for risk management instruments amid the uncertain market environment. It has delivered record derivatives performance in the last few quarters, offsetting the slower equities business. Hence, we upgrade SGX to BUY with a revised Target Price of S$8.30.
  • Going forward, SGX targets to double revenue from its Data, Connectivity and Indices, as well as Fixed Income, Currencies, Commodities segments in the next five years as SGX looks into bolt-on acquisitions to fuel growth.
  • We believe SGX's share price should continue to be well-supported by its absolute dividend of 30 Scts/year, implying 3.8% yield at current level.

Where We Differ

  • We believe that the market has largely priced in a full resolution between SGX and National Stock Exchange of India (NSE). Given the recent unrest in Hong Kong, we believe that there might be delays in the introduction of A-share index futures on HKEX which is positive for SGX.

Potential Catalysts

  • Higher-than-expected growth in securities daily average value (SDAV) is a re-rating catalyst.

Key Risks to Our View

  • Competition in derivatives business. SGX may see potential earnings downside should it face competition from HKEX which announced in March 2019 that it is planning to launch futures contracts. These may compete with SGX’s FTSE China A50 Index Futures, which accounts for 40% of SGX’s total erivatives volume.

What's New - Record Revenues in FY2019

Record derivatives revenue buffers lower equities performance

  • SGX's 4Q19 revenue of S$248m (+16.5% y-o-y, +8.4% q-o-q) continues to be driven by exceptional growth in derivatives revenue (+52.2% y-o-y, +9.3% q-o-q) on record derivatives volumes, buffered by lower equities performance which saw lower SDAV of S$1.1bn.
  • As revenue growth outpaces expenses growth, 4Q19 net profit improved to S$104m (+24.1% y-o-y, +4.2% q-o-q).

Strong derivatives volumes and collateral income powers on

  • Derivatives continued to perform strongly from 3Q19. For the full year, SGX's derivatives volumes increased 21% y-o-y, led by 41% y-o-y increase in China A50 Index futures, four-fold growth in MSCI Net Total Return derivatives, 46% y-o-y growth in FX futures, amid strong double-digit growth in commodities and freight derivatives.
  • Average fee per contract increased from S$1.02 to S$1.14, largely on the back of increased China A50 Index futures contracts.

Other developments

Optimistic on resolution with NSE over India derivatives products

  • According to SGX, NSE and SGX have jointly agreed on a proposal and have submitted the proposal to the two regulators on the implementation of a joint connect. SGX remains optimistic that the joint proposal will obtain regulatory support.

Positioning for growth and scale

  • Going forward, SGX targets to double its Data, Connectivity and Indices, as well as Fixed Income, Currencies, Commodities businesses in the next five years as SGX look into bolt-on acquisitions to fuel its growth. Among which, SGX aims to capture the digitalisation of the Fixed Income markets and rising convergence of OTC and listed FX and commodity markets as well as continues building its Index Business to capture the shift towards passive investing.

Valuation and Recommendation

Upgrade to BUY, Target Price of S$8.30.

  • We upgrade SGX to BUY as we believe SGX will continue to benefit from strong demand for risk management instruments amid the uncertain market environment.
  • We derive our revised Target Price of S$8.30 based on the dividend discount model (k=7%, g=4%, ROE=35%) as we revise our ROE assumptions from 33%, implying c.20x FY20F PE. We believe that SGX’s current PE valuation at below its 5-year historical mean is undemanding.

Source: DBS Research - 1 Aug 2019

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