• Keep NEUTRAL and SGD10.30 TP, 8% upside, c.3% yield. The implied full fiscal year securities daily average value (SDAV) data and derivatives daily average volume (DDAV) based on July-August data was below our expectations. SDAV saw a broad pick-up (+23% YoY) in August, while DDAV was flat YoY. 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, valuations are unexciting.

• August securities market turnover and derivatives turnover tracking below our estimates. In August, the securities market turnover value climbed to SGD24.3bn (-7% YoY, +35% MoM), while SDAV came in at SGD1.1bn (-12% YoY, +23% MoM). The MoM 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 SGD750m 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% YoY, -1 MoM), while DDAV was at 921,170 contracts (-1% YoY, -10% MoM). The implied FY23 SDAV is c.20% below our estimates, while the implied FY23 DDAV is c.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 SGD70- 75m, is higher than the average capex for the last five years of SGD50m. 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. The stock offers a modest and below-market dividend yield of 3.3%. Our TP continues to be based on a target P/E of 22x FY23F EPS, which is in line with its historical average P/E. Our TP includes an ESG premium of 8% over its fair value of SGD9.50.

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

Source: RHB Research - 16 Sep 2022