Simons Trading Research

Author: simonsg   |   Latest post: Wed, 18 May 2022, 11:34 AM


Singapore Exchange (SGX) - An Exchange With More to Offer. Initiate Coverage With BUY

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  • Singapore Exchange (SGX) is a multi-asset exchange with a range of liquid products, securing customer retention through its high volume market share in key products such as the FTSE Taiwan Index. SGX is also benefitting from structural tailwinds such as the electronification of OTCs and passive investing.
  • An added bonus could surface from Singapore-based secondary listings of foreign listed entities such as Grab or Sea Ltd.
  • Initiate coverage on Singapore Exchange (SGX:S68) with a BUY. Target price: S$12.35, with 17% upside.

Singapore Exchange (SGX:S68) - a Multi-asset Exchange Ensures Resilient Revenue Stream

  • Singapore Exchange (SGX)’s strength lies in its multi-asset marketplace which includes a wide range of liquid futures and options products in key asset classes such as equities, currencies and commodities. Derivatives (including currencies, commodities and equities) have contributed to a more substantial portion of revenue over the years (30% of revenue in FY14 to 49% in FY20) and is an important investment tool in a volatile investment environment.
  • As a multi-asset exchange, SGX also allows for customer stickiness. The group said that cross asset margin offsets result in customer cost savings of 30-90%. This is facilitated by the deep liquidity and high volume market share of certain key products such as the FTSE Taiwan Index and iron ore derivatives.

Volatility Remains; MSCI Changes Could Boost Derivative Volume

  • Turnover velocity remains elevated from the effects of COVID-19. SGX's 3QFY21 daily average traded value (DAV) of S$1.52b is still almost 50% higher compared with FY19 levels (3QFY19: S$1.02b).
  • Geopolitical risks and a low interest rate environment are factors which will likely keep DAV elevated. Besides, changes to the MSCI Singapore Index over the coming months such as the addition of foreign-listed entities could boost volumes in MSCI Singapore Index derivatives (7% of SGX’s equity derivatives contracts) given the hedging required.
  • Other initiatives to retain trading volumes could potentially take the form of secondary listing of foreign-listed entities such as Grab or Sea Ltd on the SGX.

Securing Growth Through Structural Tailwinds: Electronification of OTC, and Index Business From Passive Investing

  • As a result of regulatory reforms since the 2008 financial crisis, the derivatives markets have seen the group’s index business.

Blue-sky Scenario: a Grab and Sea Addition

  • Recent news reports have surfaced of a potential secondary listing of Grab on SGX. Assuming listing price on the Nasdaq to estimate its potential US-listed DAV.

Going From Strength to Strength From An Exceptional 2020

  • We forecast SGX's revenue and earnings to have a 5-year CAGR of 3.9% for share in US$/Rmb and the shift from OTC FX options trading to listed exchanges.

Initiate Coverage on SGX With BUY and a Target Price of S$12.35, With 17% Upside

    • Our target price for SGX is pegged to peers’ average of 28.0x FY22F earnings, 28.5x FY21F earnings (FY ending Jun 21). SGX also has good cash generating abilities, and is trading at 17x counterparts of similar size e.g ASX, Japan Exchange Group.
    • Catalysts to SGX's share price include
      • Secondary listings of foreign listed entities.
      • Longer-than-expected period of disruption including cyber attacks;
      • regulatory risk.

    Source: UOB Kay Hian Research - 26 Apr 2021

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    Labels: SGX

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