Singapore Exchange Limited – Deliberate Efforts to Grow January 31, 2020 630

PSR Recommendation: NEUTRAL Status: Maintained
Last Close Price: S$9.9 Target Price: S$8.52
  • SGX achieved 2Q20 revenue and net profit in line with our expectations.
  • Positive business outlook expected across multiple segments; FICC grew 20% YoY, while DCI business grew a modest 4% YoY to S$26.7mn. The equities business came in flat.
  • Acquired ‘Smart Beta’ index firm Scientific Beta for €186mn to propel DCI business.
  • We maintain our NEUTRAL call with a revised TP of S$8.52. We peg our TP to 21.5x P/E, 1 SD below SGX’s 5-year mean. We will be expecting SGX’s acquisition plan to be EPS accretive in FY21. Our earnings forecast remains unchanged.


The Positives

+  Best 2Q results over the past 5 years. A positive set of earnings for 2Q overshadowed by stellar 1Q performance. Revenue of S$231mn (+3% YoY) and profit of S$99mn (+3% YoY). FICC grew 20% YoY to $39mn in revenue while DCI business grew a modest 4% YoY to S$26.7mn. The Equities business was flat YoY (cash equities rose 4.5% YoY whilst derivatives was down 5.3% YoY).

+ Sustained pipeline of listings across all asset classes. Fixed Income listing is positive due to the growing demand for capital in Asia for infrastructure and sustainability projects. The enhanced Global Asian Bond Grant scheme (formerly known as the Asian Bond Grant scheme) will provide funding support for issuers with an Asian nexus to issue international bonds through Singapore. The scheme is expected to channel the demand for capital-raising in Asia to Singapore, for the benefit of infrastructure and sustainability projects. Equities listing remains healthy as well, with capital raised from primary fundraising on track to exceed FY19’s figures.

+  Acquisition of Scientific Beta to Propel Growth of DCI Business. The €186mn acquisition is an inorganic catalyst for SGX to double its DCI business over the next 5 years. Scientific Beta is an independent index provider that provides investable smart beta indices to its clients, allowing their clients to curate indices-tracking funds as passive investments. Factor investing has risen in popularity as investors shift towards passive investing strategies. Established by EDHEC-Risk Institute (ERI Asia), Scientific Beta has a strong research pedigree highly demanded on the market to create all-weather investment products. As at 30 September 2019, Scientific Beta reported assets replicating its indices of US$54.7bn, a 10 times growth in under four years. Scientific Beta will allow SGX to expand into the factor investing and ‘Smart Beta’ market that is expected to snowball SGX’s DCI business. The management commented that as of December 2019, Scientific Beta is a profitable company and had recorded revenue of more than €20mn. According to management, the acquisition is expected to be EPS accretive in FY2021.


The Negatives

– On a YoY basis, equity derivatives volumes fell 18% to 41mn contracts, resulting in a trading and clearing revenues to decline by 5%.

– On a QoQ basis, revenue and profit fell 7% and 13% respectively. However, QoQ results are not representative of SGX’s business due to China’s celebration of the Golden Week in October as well as the holiday season within the quarter.



We expect the trade truce between the US and China to dampen volatility, especially for SGX’s key derivatives product – FTSE China A50 Index Futures.


Investment Actions

We maintain our NEUTRAL recommendation with a revised TP of S$8.52. Our TP is pegged to 21.5x P/E, 1 SD below SGX’s 5-year mean. SGX continues to make headway in attracting global flows for derivatives products. For 2H20, we are concerned that derivatives volume will be weaker as trade tensions ease and having a high watermark recorded in 2H19 to compare against. Another worry is the headline risk stemming from the launch of MSCI China Index futures by the Hong Kong Stock Exchange.

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