• Acquisition of MaxxTrader for US$125mn to scale up FX into core pillar of growth under its multi-asset strategy. Will also broaden its client base to more than 200 institutional clients, both on the buy-side and sell-sides.
• Funded by external borrowings with expected completion by December. Earnings-accretive on an adjusted basis, including additional performance-based earn-out of up to US$35mn to be paid in CY2021 – 2022 if pre-determined targets are achieved.
• Downgrade to NEUTRAL from ACCUMULATE, albeit with higher TP of S$11.95, from S$11.25. Our TP is now pegged to 25x FY21e PE, +2SD if its 5-year mean vs. parity previously. This is in view of its stronger growth prospects. Stock positives, however, have been priced in, in our view.

SGX is buying MaxxTrader from FlexTrade Systems, a global leader in multi-asset execution and order management systems, for a cash consideration of approximately US$125mn. Closure is expected by December 2021.

The Positives

+ Further scaling up FX as a core pillar of growth. As a single-source and direct-to-market FX trading platform, MaxxTrader is expected to advance SGX’s ability to offer end-to-end FX platforms and solutions. SGX will leverage MaxxTrader’s technology to set up its electronic communication network (ECN) FX marketplace. Its aim is to offer clients a full suite of FX futures and OTC solutions, by building a primary FX OTC marketplace anchored in Singapore. Such a platform would accelerate its ability to provide fungible and convenient access to global customers to different pools of liquidity all under one integrated platform on SGX.

The acquisition will also broaden its client base to more than 200 institutional clients, including dealers, both on the buy and sell sides currently connected to its platform. It will help the bourse achieve scale and size.

+ Earnings accretive with performance-based earn-out. The bourse will acquire 100% of MaxxTrader for upfront cash of US$125mn.This values MaxxTrader at 8.3x CY2020 revenue, including working capital. The acquisition is expected to be completed by December. SGX did not disclose how much its EPS figures could be boosted by the acquisition. It plans to do so when it announces results in early August. The transaction includes an additional performance-based earn-out of up to US$35mn to be paid in CY2021 – 2022 if pre-determined targets are achieved.

The acquisition will be funded with external borrowings. We believe SGX will take advantage of current low interest rates by securing longer-term borrowings. It will also provide a further equity or loan injection of US$5mn for general corporate purpose and net working capital.

With continued fast growth in the global OTC FX market, MaxxTrader’s average daily volume is expected to grow at more than 25% in the medium term. This implies its revenue growth could accelerate from its historical 14 – 15% CAGR in the last five years.

The Negatives

Nil

Outlook

Anchoring long-term growth. The latest acquisition demonstrates SGX’s commitment to expanding its suite of products through strategic partnerships and new product development for newly-acquired businesses. We see FX as a core, fast-growing pillar in SGX’s multi-asset strategy. The deal follows SGX’s full acquisition of cloud-based FX trading platform BidFX last year. The two purchases have paved the way for the bourse to become Asia’s largest one-stop venue for international FX OTC and futures participants.

We see the potential for client acquisition in new markets and increased penetration from the cross-selling of new asset classes and products. Efforts have started to pay off, with the average number of products traded by its top 30 clients rising by more than 30% over a five year period. Fixed Income, Currencies and Commodities (FICC) and Data Connectivity and Indices (DCI) made up 33% of its revenue in 1HFY21, up from 20% in FY15 (Figure 1).

We believe the bourse will remain focused on acquiring different assets to improve end-to-end efficiency for its clients.