• Stay NEUTRAL, with SGD12.80 TP and 1% upside. Singapore Exchange's 1HFY25 core profit was in line with estimates. While securities daily average traded value (SDAV) can moderate, elevated market volatility implies higher derivatives trading volumes in 2HFY25. SGX's view of FY25 cost increase at the lower end of guidance could provide earnings support for 2HFY25. We estimate 2HFY25 PATMI to decline and earnings growth to moderate beyond FY25. As SGX's forward P/E valuation is close to its historical average, the market will seek growth catalysts to push valuation higher.
• Management guidance. SGX is optimistic of achieving its medium-term revenue (excluding treasury income) growth guidance of 6-8% CAGR. It expects to sustain its cost discipline in 2HFY25 and believes that FY25 expense increase could come in at the lower end of the 2-4% growth guidance. In an earlier guidance, SGX had stated that its medium-term expense growth is expected to be in the low-to-mid single digit percentage CAGR. For FY25, SGX now expects the capex to come in at the lower end of the SGD70m-SGD75m guidance. Beyond FY25, capex is expected to increase due to investments in the modernisation of its trading and clearing platforms. SGX expects capex as a percentage of revenue to remain below the historical average of 7%. SGX's 1HFY25 dividends came in at SGD18 cents per share. It reiterated the expectation of growing the DPS at mid-single digit CAGR in the medium term.
• Our estimates. While we expect the SDAV to remain flat, the derivatives volume should continue to grow during FY26-27. Within the derivatives business, the volumes for currencies and commodities (CC) could exceed the volumes for equity derivatives by the end of FY27. While the overall revenue should grow at a 6% CAGR, the fixed income, currencies, and commodities (FICC) revenue should register a 12% CAGR during FY24-27. Aided by margin expansion, operating profit should grow at 8% CAGR during FY24-27. We estimate DPS to grow at a 4% CAGR during the forecast period.
• Growth challenges and unexciting yield. We maintain that a material improvement in SGX's moderating earnings growth outlook remains dependent on elevated local equity market sentiment, an increase in the number of new IPO listings, successful new product launches, earnings-accretive acquisitions, and a favourable outcome of the ongoing market review exercise - all of which are a bit difficult to pencil into our estimates right now. Despite factoring in DPS growth which is in line with the guidance, SGX's forward yield of 3% is unexciting and well below the Singapore equity market's yield. Our target P/E of 21x is in line with its historical average. Our TP includes a 4% ESG premium to its fair value.

Source: RHB Research - 7 Feb 2025