• Stay NEUTRAL with a new SGD9.30 TP from SGD9.00, 2% upside and a c.4% yield. We make small adjustments to securities daily average value (SDAV), derivatives daily average volume (DDAV), and treasury income estimates for FY23F (Jun). We also roll forward our valuation basis from FY23F EPS to 12 months' forward EPS. Despite mild upward earnings adjustments, we believe SDAV could surprise us on the downside. We assess Singapore Exchange to be fairly priced, amidst expected earnings declines for FY23F and an underwhelming yield.

• SDAV has been on a declining trend. Based on its last reported operating statistics, SGX reported two successive QoQ and YoY declines in SDAV as of 1QFY23 and eight consecutive months of either flat or YoY negative growth in SDAV as of Oct 2022. Based on our earlier estimates, the implied FY23F SDAV, calculated on the first four months of data for FY23, was 7% below our estimate. We lowered our FY23F SDAV by 5% and still believe that there could be further downside risks to our estimates.

• DDAV growth continues to track expectations. SGX’s DDAV has seen nine consecutive months of either flat or YoY positive growth as of Oct 2022. Despite the rise in competition, SGX has managed to retain a large market share on its China A50 index futures product. We remain confident in SGX’s derivatives business, with strong growth expected from its equity, FX, and commodity derivatives volumes. So far, the reported operating statistics for FY23 have tracked our growth expectations. We have provided our earnings and TP sensitivity to changes in SDAV and DDAV in Figure 1 and Figure 2.

• We raise our treasury income estimates. On the back of an ongoing rise in interest rates, we have increased our treasury income estimates for FY23–FY25. We expect the rise in treasury income to commence in 2HFY23 and move higher at a gradual pace during the forecast period.

• The stock is trading at its historical mean P/E ratio; our TP includes an ESG premium. SGX’s forward P/E of 22x is in line with its historical 1-year forward P/E, which we believe is a fair valuation. We suggest investors to wait for a better entry point as the expectation of a muted SDAV outlook going forward could pose a downside risk to our and the consensus estimates. In addition, the stock offers a below-market dividend yield of 3.5%. Our TP is based on a target P/E of 21x on 12 months’ forward EPS. Our TP includes an ESG premium of 8% over its fair value of SGD8.60.

Source: RHB Research - 8 Dec 2022