Singapore Exchange (SGX) - FY21 Clouded by Lower Treasury Income & Cost Outlook; Downgrade to HOLD.

Date: 06/08/2021

Source  :  UOB KayHian
Stock  :  SGX       Price Target  :  11.65      |      Price Call  :  HOLD
        Last Price  :  9.85      |      Upside/Downside  :  +1.80 (18.27%)

  • SGX reported FY21 headline net profit of S$445m, down 6% y-o-y, while adjusted net profit came in at S$447m. The group was affected by lower treasury income, which saw the equities derivatives segment decline almost 20% y-o-y in FY21. While growth is in focus, especially for its Forex business, costs appear to be challenging.
  • Downgrade SGX to HOLD with a target price of S$11.65.
  • On the bright side, SGX’s medium-term prospects remain healthy while potential new initiatives such as SPACs are still in the balance.

SGX's FY21 Earnings Below Expectations

  • Singapore Exchange(SGX, SGX:S68) reported adjusted net profits of S$446.9m (-5% y-o-y), forming 97%/94% of our and consensus’ estimates, missing expectations.
  • SGX's 4QFY21 dividend was S$0.08, comparable on a y-o-y basis. This brings full-year dividends to S$0.32 cents (vs S$0.305 in FY20). SGX is also putting in place a scrip dividend scheme, to offer shareholders to reinvest their cash dividends. This is largely viewed as disappointing though management noted that the discounted price of shares on offer is likely to be low.

Affected by lower treasury income from lower yields.

  • Volumes were fairly secured with cash equities traded value FTSE Asia expansion suite.
  • Overall, excluding the effects of treasury income, revenue would have increased 7% y-o-y.

In growth mode…

  • SGX’s growth initiatives include:
    1. the setting up of a Forex Electronic Communication (ECN);
    2. climate-related initiatives; and
    3. continued investments into BidFX and Scientific Beta, the group’s recent acquisitions.

…though costs appear challenging in the near term.

  • SGX's operating expenses increased (+10% y-o-y) mainly from higher staff costs due to a higher head contributes approximately 20% of the equities derivatives segment (30% in FY20).

Forex Leading the Growth Initiative

  • SGX is looking to scale its Forex franchise, targeting a launch of its FX Electronic Communication Network by the end of the year.
  • SGX has also recently acquired MaxxTrader, a leading provider of Forex pricing and risk solutions for sell-side institutions, and a multi-dealer platform for buy-side clients, for US$125m. The acquisition, at 8.3x FY20 revenue is complementary to its existing Forex offerings and provides for further growth in the group’s Forex business. However, near-term contribution is still dwarfed by the group’s portfolio and synergistic benefits, such as from the sharing of infrastructure, which could take some time to develop.

Reduce SGX FY22-23F Earnings Forecast by 6-9%

  • We accounted for lower stability. While a higher interest rate environment could aid treasury income, it could also adversely affect trading velocity.
  • We still like SGX’s medium-term growth prospects as well as potential new initiatives such as SPACs (currently awaiting regulatory approval and secondary listings), which close to S$12.15, or an implied P/E of 30x FY22F earnings.
  • Catalysts to SGX's share price:
    • Secondary listings of foreign listed entities.
    • Longer-than-expected period of trading volatility.
    • M&As.

Source: UOB Kay Hian Research - 6 Aug 2021

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