• We make small adjustments to Singapore Exchange (SGX)'s securities daily average value (SDAV), derivatives daily average volume (DDAV), and treasury income estimates for FY23 (Jul 2022 to Jun 2023). We also roll forward our valuation basis from FY23F EPS to 12 months' forward EPS.
• Despite mild upward earnings adjustments, we believe SGX's SDAV could surprise us on the downside.
• We assess SGX to be fairly priced, amidst expected earnings declines for FY23F and an underwhelming yield.

SGX's SDAV Has Been on a Declining Trend

• Based on our earlier estimates, the implied FY23F SDAV, calculated on the first four months of data for FY23, was 7% below our estimate. We lowered our FY23F SGX's SDAV forecast by 5% and still believe that there could be further downside risks to our estimates.

SGX's DDAV Growth Continues to Track Expectations

• SGX’s DDAV (derivatives daily average volume) has seen 9 consecutive months of either flat or y-o-y positive growth as of Oct 2022. Despite the rise in competition, SGX has managed to retain a large market share on its China A50 index futures product.
• We remain confident in SGX’s derivatives business, with strong growth expected from its equity, FX, and commodity derivatives volumes. So far, the reported operating statistics for FY23 have tracked our growth expectations.
• We have provided our earnings and target price sensitivity to changes in SGX's SDAV and DDAV in the report attached below.

We Raise Our Treasury Income Estimates

• On the back of an ongoing rise in interest rates, we have increased our treasury income estimates for FY23–FY25. We expect the rise in SGX's treasury income to commence in 2HFY23 and move higher at a gradual pace during the forecast period.

SGX Is Trading at Its Historical Mean P/E Ratio; Our Target Price Includes An ESG Premium

• SGX’s forward P/E of 22x is in line with its historical 1-year forward P/E, which we believe is a fair valuation.
• We suggest investors to wait for a better entry point as the expectation of a muted SDAV outlook going forward could pose a downside risk to our and the consensus estimates. In addition, SGX offers a below-market dividend yield of 3.5%.
• Our target price for SGX is based on a target P/E of 21x on 12 months’ forward EPS. Our target price includes an ESG premium of 8% over its fair value of S$8.60.

• Stay NEUTRAL on SGX with a new S$9.30 target price from S$9.00, 2% upside and a ~4% yield.

Source: RHB Invest Research - 8 Dec 2022