SGX declined 1.1% yesterday to close at $7.12. Macquarie Equities Research (MER) upgraded SGX on 18 Dec to an ‘Outperform’ rating with a 12-month price target of $7.87 (+10.5% from previous close). Some excerpts from the research report are shown below.

Event
MER upgrades SGX to Outperform from the previous Underperform. MER attributes SGX’s weak share price performance to tepid cash equities turnover in the domestic market. Indeed, 2013 has been a tough year for SGX’s share price, but earnings and returns on equity (ROE) have been relatively strong on revenue diversification and cost control. MER does not expect trading to remain at crisis levels next year, and MER believes that SGX SP could be set for a better 2014.
 
Impact
Equities trading value now at crisis levels – this is overdone. But trading has indeed dribbled down to crisis levels. The 30-day average market turnover has plummeted 49% since the mid-year peak to reach just S$944m. Market turnover is now at the third lowest that it has been post Global Financial Crisis (GFC), with average trading value just slightly higher than it was during the GFC itself in 2008 and the PIIGS / Grexit crises of 3Q11 / 2Q12.
 
Strategy view: Neutral on Singapore. MER is calling for a better 2014 for the Singapore market and has upgraded Singapore to Neutral within the region. While neither view suggests a tsunami of market activity, MER thinks it reasonable to expect a recovery of market volumes in 2014.
 
Structural view: Decreasing correlation with STI turnover, in the longer term. SGX’s long-term share price performance has been 90% correlated to 30-day securities daily average value over the past 12 years. However, MER believes that SGX is best positioned among Asian exchanges for a “decoupling” of the stock’s performance from recent levels of cash equities turnover. MER believes this process is already underway, as more recent correlations are lower. MER thinks the decoupling will accelerate going forward as non-cash equities revenue drives growth, including earnings from ex-Singapore financial derivatives, OTC clearing, and future rollouts of commodities and energy businesses.
 
MER’s action and recommendation
Upgrade to Outperform on a moderately constructive strategy outlook for the Singapore market. The stock is trading at 21x FY14E consensus EPS, in line with its historical average. MER believes that 1) trading value will not remain at crisis levels going forward, and that 2) SGX’s share price will rise to reflect this. But this is more than a mere market call, as SGX’s gradually increasing earnings diversity should erode the view that it is a simple proxy on the cash equities markets of Singapore.

Source: Macquarie Research - 10 Jan 2014