• Singapore Exchange (SGX)’s FY22 (1 Jul 2021 to 30 Jun 2022) results did not yield any major surprises. Management is guiding for a 7-9% increase in expenses and higher-than-normal capex for FY23F.
• Our expectation is that while derivatives daily average volume (DDAV) will move higher, FY23F securities daily average value (SDAV) will remain muted.
• We lower FY23F-24F earnings forecast for SGX by 3-4%. A modest growth outlook, below market dividend yield, and forward P/E being higher than the historical average support our current NEUTRAL rating, with new S$10.30 target price from S$10.70, 3% upside.

SGX's FY22 Results Were in Line With Expectations

• SGX reported its highest revenue since its listing – S$1,099m (+4% y-o-y) – accounting for 99% of our estimate. Revenue growth was negatively impacted by lower yields for treasury income as well as the decline in total traded value and average clearing fee for cash equity business.
• SGX's FY22 PATMI grew 1% y-o-y to S$451m (98% of our estimate). As per SGX, recurring PATMI lifted by 2% y-o-y to S$456m. SGX's dividend for FY22 remained unchanged at S$0.32.

Guiding for Elevated Expenses and Higher Capex

• SGX is guiding for 7- 9% growth in total expenses for FY23, of which 2% growth will come from the full year impact of the MaxxTrader acquisition. Much of the other increase in costs will come from higher expenses from the buildout of its OTC FX business and higher staff costs from salary increments.
• SGX expects expenses to grow at mid-single digit during the medium term. FY23F capex is estimated at S$70-75m, to be used for investments in FX franchise, enhancements to its platform and system architecture, and improvements to office efficiency. The average capex for last 5 years was S$50m.

Moderating FY23-FY24 Estimates; SGX's Valuation Is Reasonable

• Accounting for higher operating costs and a likely muted SDAV in FY23F, we lower FY23F-FY24F earnings forecast for SGX by 3-4% each. SGX’s FY23F P/E of 22.7x is now slightly above its historical average of 21.9x. With no visibility of a higher dividend payout, SGX offers a modest yield of 3.2% as compared to Singapore’s market yield of more than 4%.
• Our target price for SGX continues to be based on a target P/E of 22x FY23F EPS, which is in line with its historical average P/E. We view our target P/E as reasonable – given the expectation of a modest (mid-single digit) growth in profit. Our target price for SGX includes an ESG premium of 8% over its fair value of S$9.50.

• Downside risks:
  • Higher-than-guided operating costs for FY23F, and
  • slower ramp-up in revenue contributions from acquisitions.
• Upside risks:
  • Higher-than-estimated SDAV from the potential pipeline of exchange traded funds, REITs, and special purpose acquisition company listings, and
  • continued global macroeconomic uncertainties leading to higher deriviatives volumes.

Source: RHB Invest Research - 19 Aug 2022