Resilient Platform Poised to Deliver Amidst Volatility
SGX (SGX:S68)’s 1H21 PAT came ahead of Street/MKE expectations supported by contributions from recent acquisitions and stronger cash equities volumes.
Derivatives saw limited disruption from the departure of key contracts pointing to the resilience of its multi-asset platform. Higher contract pricing, strong equity market velocity and new product launches should continue to support earnings momentum and keep dividend visibility high, in our view.
We raise our target price to S$11.48 from S$10.77. Maintain BUY.
Acquisitions Delivering
The integration of BidFX and Scientific Beta contributed 6% of SGX's revenues in 1H21. Strengthening demand for fixed income listings together with new product launches – especially in the ESG space – should continue to drive growth going forward, we believe.
Management claims they are willing to leverage SGX’s balance sheet (current debt-to-equity 9.6%) for further accretive acquisitions. This should be a positive catalyst, given their track record so far.
Tailwind From Cash Equities, Derivatives
Derivative volumes increased 4% y-o-y despite the exit of key MSCI contracts. The newly introduced FTSE contracts seem to be gaining traction. SGX’s ability to retain liquidity here is a strong indicator of the successful execution of its multi-asset platform. While derivative fees fell 5% y-o-y on the back of introductory pricing for the new FTSE contracts, we expect this to normalise in 2H21.
Separately, cash equity average daily traded value (ADV) increased 19% y-o-y and velocity rose to 49% (~34%). Clearing fees increased 2.5% y-o-y driven by a larger retail mix, we believe. Liquidity support by central banks and the COVID-19 recovery theme could continue to support this momentum, in our view.
We have raised our FY21 average daily value (ADV) forecasts to S$1.3bn (from S$1.0bn).
Raise SGX Target Price to S$11.48. Maintain BUY
Our changes to equity and derivative volumes and fee expectations have raised FY21-23E PAT by 1-7%. We refresh our blended multi-stage DCF (WACC 7.2%, 1% terminal growth) and peer P/E (upgraded to 29x target) price to S$11.48.
In past growth cycles, SGX's share price has traded up to 26-27x P/E.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....