• SGX's 2HFY21 core net profit of S$207.7m missed our and consensus estimates, primarily due to weaker treasury income given the low yield environment.
• We see earnings upside from synergies between MaxxTrader and BidFX but this could be a medium-term prospect as traction picks up.
• Downgrade SGX to HOLD as we factor in the prolonged impact of a lower rate environment. Nonetheless, we remain hopeful of sustained trading volumes.

Underlying Trends Intact But Hit by Low Yield Environment

• SGX (SGX:S68) reported 2HFY21 (Jan 2021 to Jun 2021) core net profit of S$207.7m (-13.4% y-o-y, -21.6% h-o-h), missing our/consensus expectations by 17%/12%. Correspondingly, FY21 net profit of S$445m was 9% lower than our full-year estimate and formed 91%/94% of our/consensus forecasts.
• Topline growth in 2HFY6/21 was comparable h-o-h but declined 7% y-o-y as the growth in FICC (+30% y-o-y) and DCI (+16% y-o-y) segments was offset by a decline in equities (-16% y-o-y). This stemmed primarily from weaker treasury income as a result of the low yield environment. Excluding treasury income, SGX's revenues rose 7% y-o-y in FY21.
• While underlying opex remains well-controlled, management provided a higher total expense guidance of S$565m-575m in FY22F (vs. S$535m-545m in FY21), with more than half of the increase attributable to continued investments in BidFX and Scientific Beta (SB) and new growth avenues, such as the FX Electronic Communications Network. Notably, SB and BidFX contributed ~S$28m revenues in 2HFY6/21 (1HFY6/21: S$34m).

FICC as the Key Driver of Growth Going Forward

• Fixed income, currencies and commodities (FICC) remained SGX’s main driver of growth. Amongst its key contributors were stronger commodities trading volumes, which rose 3% y-o-y to 25m contracts, and its 100% market share in the offshore iron ore market.
• SGX emphasised the possibility of combining upside could be a longer-term prospect.

Steady Cash Equities Dragged by Weaker Derivatives Segment

• Cash equities were supported by a FTSE Asia expansion suite.

We Cut FY22-23F Earnings Forecast by ~8-10% and Downgrade SGX to HOLD

• While we expect equity turnover to sustain over FY22F given the macro uncertainty, we downgrade SGX to HOLD as we cut FY22-23F earnings per share forecasst by ~8-10% to account for the lower treasury income and higher opex.

• Our target price of S$10.70 for SGX is pegged to A-share futures launch by HKEX.

Source: CGS-CIMB Research - 6 Aug 2021