• Singapore Exchange realigns business and client organisation; no additional costs associated with reorganisation.
• New units to include: Fixed Income, Currencies and Commodities, Equities, Data, Connectivity and Indices and Global Sales and Origination.
• Continuously build on its strengths within units to pursue growth and scale; no tangible growth targets as yet.
• Likely to see acquisitions and new partnerships coming through.

What’s New?

SINGAPORE EXCHANGE LIMITED (SGX:S68) realigns business and client organisation; no additional costs associated with reorganisation.

• The new structure will not incur additional costs associated with reorganization. There will be four business and client units being formed, namely
  1. Fixed Income, Currencies and Commodities (FICC)
  2. Equities, comprising cash equities and equity derivatives businesses
  3. Data, Connectivity and Indices (DCI), renamed from the existing Market Data and Connectivity (MDC) unit, and
  4. Global Sales and Origination (GSO).

Equities to emerge as largest revenue contributor.

• A combination of cash equities and equity derivatives businesses will see the formation of the largest unit which boasts the highest operating profit margin, contributing 70% of Singapore Exchange’s revenues.
• DCI (previously MDC) contributes 11% of revenues (as of 3QFY19). The remaining revenues are attributed to FICC as GSO will not be a revenue segment but rather a combination of equities and debt capital market teams with international offices and specialist sales teams.

Continuously building on strengths within units to pursue growth and scale; no tangible growth targets as yet.

• According to Singapore Exchange, FICC has now emerged as a “set” and now wishes to capture opportunities from the rising the digitalisation of Fixed industry, while continuing to drive synergies between global trade and the space. The FICC and DCI units are also expected to enjoy scale.
• At present, there are no tangible targets for the various FICC and DCI is likely to be aggressive Equities.

Likely to see acquisitions and new partnerships coming through.

• Singapore Exchange had previously made Trumid (a New York-based startup that runs an electronic corporate bond trading platform) and BidFX (a trading platform), among others. Management believes that the scale, with a focus on execution capability.
• According to management, Singapore Exchange is keen on space. Recall that in 2QFY18, Singapore Exchange had announced its intention to establish a Euro Medium to provide “flexibility to fund organic”.

Maintain HOLD.

• We derive our Target Price of S$7.05 based on the dividend discount model (k=8%, g=4%, ROE=33%), implying 20x FY20F PE.
• Given concerns over potential competition from Hong Kong Exchange (HKEX)’s upcoming MSCI China A Index futures, we believe there are no visible catalysts for Singapore Exchange now and thereby maintain our HOLD call.

Source: DBS Research - 27 Jun 2019