• NEUTRAL and SGD11.40 TP, 3% downside. Singapore Exchange booked an exceptionally strong September and 1QFY25 (Jun) operating statistics, aided by softening monetary policies, investors shifting portfolios to China post its stimulus announcement, and improved economic development indicators here. If 1QFY25’s strong data sustains in 2QFY25, it increases our estimates and TP by 5%. We still expect trading activity moderation in 2HFY25. We see downside risks to our treasury income estimates too amidst falling interest rates, and maintain that SGX’s c.3% forward yield stays unexciting.

• Strong trading data. September turnover of SGD30.4bn and securities daily average traded value (SDAV) of SGD1.45m were up 75% and 67% YoY, aided by strong rises in the turnover for the top three sectors: Financials (which includes REITs), industrials, and telecoms. 1QFY25 turnover and SDAV were up 17% and 10% YoY (Figure 1). SGX noted that Singapore’s stock market was the second most actively traded in the region in September. Increased market volatility – arising from China’s stimulus announcement – drove the volumes for derivative products higher across equities, FX, and commodities. September derivatives volume of 28.9m contracts and derivatives daily average volume (DDAV) of 1.37m contracts were up 34% and 28% YoY. 1QFY25 derivatives volume and DDAV were up 9% and 3% YoY (Figure 2). The implied 1HFY25 SDAV and DDAV exceeded our estimates by 10% and 6%.

• Earnings sensitivity. We expect the market volatility to persist in the near term, as investors await clarity on the interest rate outlook, outlook for Chinese economic growth amidst the announced stimulus package, and outcome of the US election. While we expect this volatility to subside in 2HFY25, we assess that, if the strong data from 1QFY25 sustains in 2QFY25, it would increase our FY25-26F earnings by 4.5% each and increase our TP by 5%. We have included our FY25F earnings and TP sensitivity to changes in SDAV and DDAV in Figures 7 and 8.

• Unexciting yield, valuation basis, and upside risks. In line with management’s guidance of increasing dividends, we have already built in a 4% DPS CAGR during FY24-27. However, SGX’s forward yield of c.3% remains unexciting. We continue to value this counter based on c.21x forward P/E, which is in line with its historical average. Our TP includes a 4% ESG premium to its fair value of SGD11, given SGX’s 3.3 ESG score vs 3.1 country median. The elevated SDAV and DDAV for the rest of FY25 and sustained improvement in trading volumes on the SGX – as a positive outcome from the Monetary Authority of Singapore’s review – are the key upside risks.

Source: RHB Research - 17 Oct 2024