• Still NEUTRAL, new SGD10.80 TP (from SGD10.40), 10% upside. Singapore Exchange’s FY24 (Jun) core profit was c.5% above estimates due to better cost control and higher-than-estimated other income. It also paid a higher final dividend. We raise FY25-26 profit by 5-6% to account for higher revenue and better margins. We see downside risks to our treasury income estimates amidst potentially lower interest rates. Our estimated securities daily average traded value (SDAV) and derivatives average daily volume (DDAV) increases are also likely priced in.

• Management guidance. SGX aims to grow revenue (excluding treasury income) at a 6-8% CAGR in the medium term. This will be driven mainly by low to mid-teen percentage growth in its over-the-counter (OTC) FX and exchange-traded derivatives businesses. SGX expects to achieve positive operating leverage as expense growth is anticipated to be in the low to mid- single-digit percentage CAGR in the medium term. It expects FY25 expenses to grow by 2–4% YoY, while capex is expected to be at SGD70-75m. Beyond FY25, capex is expected to further increase due to continued investments in the modernisation of its exchange trading and clearing platforms and data centre. SGX expects capex to remain below the historical average of 7% of revenue over the next cycle. It also reiterated its medium-term target to grow DPS at a mid-single-digit percentage CAGR.

• Our estimates. We expect the derivatives business’ revenue growth to significantly exceed the growth in securities business revenue. Within the derivatives business, we expect volumes for currencies and commodities (CC) to significantly exceed the volumes for equity derivatives, with CC derivatives volumes surpassing equity derivatives volumes before the end of FY27. Fixed income, currencies, and commodities (FICC) revenue should register a c.14% CAGR during FY24–27. Overall revenue should grow at a c.5% CAGR during the same period. Thanks to margin expansion, recurring products should grow at a c.6% CAGR for FY24–27. We estimate DPS to grow at a c.4% CAGR during the forecast period. SGX expects (and we agree) an increase in equity listings in the coming years.

• Unexciting yield and ESG premium. Despite SGX’s plans to boost dividends, its forward yield of 3.6% and FY27 yield of 4.0% remain unexciting compared to the Singapore equity market’s yield. We continue to value SGX based on c.21x forward P/E, which is in line with its historical average. Our TP includes a 6% ESG premium to its fair value of SGD10.20.

Source: RHB Research - 12 Aug 2024