• The implied full fiscal year securities daily average value (SDAV) data and derivatives daily average volume (DDAV) for Singapore Exchange (SGX) based on July-August data was below our expectations. SDAV saw a broad pick-up (+23% y-o-y) in August, while DDAV was flat y-o-y.
• While we expect SGX’s treasury income to benefit from rising interest rates, elevated operating costs and higher-than-historical average capex could keep growth muted in the near term.
• With FY23 P/E in line with the 22x historical average, SGX's valuations are unexciting. Keep NEUTRAL and S$10.30 target price, 8% upside, ~3% yield.

SGX's August Securities Market Turnover and Derivatives Turnover Tracking Below Our Estimates

• In August, the securities market turnover value climbed to S$24.3bn (-7% y-o-y, +35% m-o-m), while SDAV came in at S$1.1bn (-12% y-o-y, +23% m-o-m). The m-o-m rise in trading activity was aided by the end of the corporate earnings season and a strong month-end rebalancing.
• SGX estimates that institutional portfolio rotation led to S$750m in net institutional inflows in August – the highest since January – and mainly into the financial and consumer sectors.
• Derivatives traded volume for the month was 20.4m contracts (+4% y-o-y, -1 m-o-m), while DDAV was at 921,170 contracts (-1% y-o-y, -10% m-o-m). The implied FY23 SDAV is ~20% below our estimates, while the implied FY23 DDAV is ~8% below. Nevertheless, our estimates are unchanged for now as it is still early in the fiscal year.

Elevated Expenses and Capex in the Near Term; Valuation Is Reasonable

• During the FY22 results announcement, SGX guided for 7- 9% growth in total expenses in FY23. It expects expenses to grow at mid-single digits during the medium term. FY23F capex, estimated at S$70- 75m, is higher than the average capex for the last five years of S$50m.
• The share price weakness following SGX’s FY22 results announcement has brought its FY23F P/E down to 21.7x, which is in line with its historical average since 2014.
• SGX offers a modest and below-market dividend yield of 3.3%. 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. Our target price includes an ESG premium of 8% over its fair value of S$9.50.

Risks

• 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 derivatives volumes.

Source: RHB Invest Research - 16 Sep 2022