• NEUTRAL, SGD9.30 TP, 2% upside. 1HFY23F (Jun) securities daily average value (SDAV) and derivatives daily average volume (DDAV) are tracking our forecasts. FY23F revenue is 5% below the Street’s, amidst lower SDAV assumption. While SDAV rose YoY in Dec 2022, the outlook for cash equities remains weak amidst an uncertain macroeconomic environment and low market valuations, which will delay new listings. A pressured EBITDA margin, a P/E that is level with the historical mean and a lacklustre dividend yield may hamper the stock’s re-rating.

• Securities volume grew YoY in December but declined YoY for 1HFY23. While the STI was among the strongest stock market benchmarks in 2022, the index fell 1.2% in December. The total securities market turnover value was also underwhelming at SGD19.6bn (unchanged YoY, -28% MoM), while the SDAV stood at SGD0.94bn (+10% YoY, -24% MoM). SDAV for 2QFY23 was flat YoY, while it was down 7% YoY in 1HFY23 (Figure 1). The implied FY23F SADV, based on the first six months of data for FY23, is 1.6% below our estimate. In December, Singapore Exchange saw the listing of LMS Compliance on its Catalist board. We maintain that SGX could continue to see weakness in its cash equities business and maintain our below-consensus estimates.

• The derivatives business across all asset classes continues to grow. In December, the total derivatives traded volume was 19.9m contracts (+3% YoY, -16% MoM). DDAV amounted to 0.95m (+13% YoY, -12% MoM). A continued rise in risk management activities drove derivatives volume growth in FX and commodities, as global markets responded to another round of rate hikes by major central banks and China’s surprise earlier-than-expected reopening. DDAV for 2QFY23 was up 21% YoY and for 1HFY23 was up 12% YoY (Figure 2). The implied FY23F DADV, based on the first six months of data for FY23, is 1.4% below our estimate.

• Declining margins, a fair valuation, and an unexciting yield. We estimate SGX’s EBITDA margin to decline from 57.7% in FY22 to 55.1% in FY23 amidst elevated operating cost pressures. We believe the cash equity business will underperform amidst decelerating global growth. So far, the operating data for SDAV and DDAV is tracking our estimates. If the trend continues, we expect to see downside risks to consensus earnings forecasts emerging. SGX’s 1-year forward P/E of 22x is in line with its historical average P/E. Its yield of 3.5% is below the STI’s forward yield of 4.8%. Our TP is based on a target P/E of 21x on 12 months’ forward EPS, and includes an ESG premium of 8% over its fair value of SGD8.60.

Source: RHB Research - 12 Jan 2023