• We cut FY23-25F earnings forecast for Singapore Exchange (SGX:S68) by 8-9% on lower securities daily average value (SDAV) estimates. The implied FY23F (Jul 2022 to Jun 2023) SDAV and derivatives daily average volume (DDAV), based on SGX’s 1QFY23 reported data, were below our forecasts.
• SGX's derivatives volume may stay high as investors try to manage portfolio risks, but we believe securities market turnover could remain muted in the near term as investors try to assess what comes next. This, and the high operating costs, may keep growth muted in FY23.

SGX's 1QFY23 Market Turnover Data Fell Below Our Estimates

• In September, the securities market turnover value climbed to S$25.8bn (-5% y-o-y, +6% m-o-m), while SDAV came in at S$1.17bn (-5% y-o-y, +6% m-o-m).
• The securities turnover and SDAV for 1QFY23 (Jun 2022 to Sep 2022) were at S$68.1bn (-13% y-o-y, -15% q-o-q) and S$1.06bn (-13% y-o-y, -19% q-o-q). The implied FY23 SDAV, based on 1QFY23 data, was 16% below our old estimates. We have lowered FY23F SDAV by 9%.
• DDAV rose 14% m-o-m in September to 1.05m contracts (+9% y-o-y), achieving a single-day record of 2.97m contracts on 27 Sep. Total traded volume for the month climbed 9% m-o-m to 22.3m contracts (+5% y-o-y). The implied FY23 DDAV, based on 1QFY23 data, was 5% below our old estimate. We have lowered FY23 DDAV by 2%.

SGX's Valuations Are Starting to Look Interesting, But Investors Can Wait

• While valuations are starting to look compelling, as SGX’s FY23 P/E of 21.2x is now below the historical average of 22x, we believe that muted securities market turnover in coming quarters could keep investors at bay for now. Moreover, SGX offers a below-market dividend yield of ~4%.
• Our target price for SGX is based on a target P/E of 21x on FY23F EPS (vs 22x FY23F EPS previously), which is a tad below its historical average P/E. We believe this is reasonable, given the muted near-term earnings outlook.
• Our target price for SGX includes an ESG premium of 8% over its fair value of S$8.60.
• Maintain NEUTRAL rating on SGX with new target price of S$9.00 (down from S$10.30), 6% upside with ~4% yield.

Risks

• Downside risks are higher-than-guided operating costs for FY23F, and a slower ramp-up in revenue contributions from acquisitions. The upside risks comprise higher-than-estimated SDAV from the potential pipeline of exchange traded funds,
• REITs, and special-purpose acquisition company listings, as well as continued global macroeconomic uncertainties leading to higher derivatives volumes.

Source: RHB Invest Research - 21 Oct 2022