• The implied FY23F (Jul 2022 to Jun 2023) securities daily average value (SDAV) of Singapore Exchange (SGX:S68) based on the first four months of data is below our forecast. Thanks to a strong rise in derivatives volume across multiple asset classes, the implied FY23F derivatives daily average volume (DDAV) is tracking our forecast.
• There will be a downside risk to our estimate, if the ongoing softening trend in SDAV continues.
• After the recent rebound in SGX's Share Price, the stock looks fairly priced, amidst a muted earnings outlook.

YTD-FY23F Securities Market Data Is Below Our Estimate

• In October, the total securities market turnover value of SGX was S$23.1bn (-5% y-o-y, -10% m-o-m), while SDAV stood at S$1.15bn (unchanged y-o-y, -1% m-o-m).
• An uncertain forecast for growth, trade, inflation, rates, and earnings throughout the month characterised Singapore's stock market activity in October.
• The industrial, telecommunications, technology, and energy sectors led net fund inflows, while the REIT sector was mostly responsible for net outflows.
• The implied FY23F SDAV, based on first four months of data for FY23, is 7% below our estimate. We leave our forecast unchanged for now.

Strong Growth in Derivatives Volume, in Line With Our Expectations

• Derivatives volume across multiple asset classes reached new highs amid increased trading activity by global institutions, as hopes that central banks will slow their interest-rate hike cycles offset concerns about China's economic outlook. DDAV increased to 1.1m contracts in October (+23% y-o-y, +8% m-o-m).
• Total derivatives traded volume was up 21% y-o-y but down 1% m-o-m to ~22m contracts. The implied FY23F DDAV, based on the first four months of data for FY23, is in line with our estimate.

P/E Valuation Has Reverted to Mean After Recent Share Price Jump

• SGX's Share Price has increased 11% in the last one month and has outperformed the STI by ~2%. This has brought its forward P/E to 22.2x, which is in line with its historical 1-year forward P/E of 22.1x.
• Going forward, the expectation of a muted SDAV outlook could pose a downside risk to our and consensus estimates. This could keep investors at bay for now. Moreover, the stock offers a below-market dividend yield of 3.5%.

Our Target Price Includes An ESG Premium

• Our target price for SGX is based on a target P/E of 21x on FY23F EPS, which is a tad below its historical average P/E. This is reasonable, given a muted near-term earnings outlook.
• Our target price for SGX includes an ESG premium of 8 % over its fair value of S$8.30.

• Keep NEUTRAL on SGX with S$9.00 target price, 1% downside.

Source: RHB Invest Research - 23 Nov 2022