UOB KH lifts SGX's TP to $9.74 on projected y-o-y growth from most segments

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The estimate, which excludes SGX’s cash equities segment, is based on “strong volumes” seen in the 1HFY2022.

UOB Kay Hian analyst Llelleythan Tan has kept his “hold” recommendation on Singapore Exchange (SGX) before the exchange releases its 1HFY2022 results on Feb 4.

In his report dated Jan 18, Tan has, however, lifted SGX’s target price to $9.74 from $9.41 previously.

The higher target price is pegged to a price-to-earnings (P/E) multiple of 23.8 times FY2022 earnings, and +1 standard deviation of SGX’s historical forward P/E.

“Given competition from The Stock Exchange of Hong Kong’s (HKEX) MSCI A50 index futures offering, we remain cautious on the impact of competition on SGX’s future earnings. However, we think that the success of new exciting initiatives (OTC Forex offerings, government initiatives, depositary receipt linkages, SPACS) could re-rate SGX to trade similar to peers (29.6 times).

The recommendation comes after SGX released its market statistics for December 2021 on Jan 14.

During the month, the exchange reported total securities market turnover of $19.6 billion, which is a 19.6% y-o-y drop from the $24.39 billion seen in December 2020.

During the 1HFY2022 ended December, SGX reported total securities turnover value of $150.44 billion, which fell 7% y-o-y from the high base in 2020.

“The downtrend was due to lower trading velocity in 2021 as compared to an elevated 2020 and we expect turnover value to continue trending downwards and bottom out to pre-Covid-19 levels (1HFY2020: -10% y-o-y from 1HFY2022) going into 2HFY2022. Average clearing fee per contract for 1QFY2022 was at 2.57 basis points, lower by 0.05 basis points q-o-q and 0.17 basis points y-o-y,” writes Tan.

Meanwhile, SGX reported 6.0% y-o-y growth in its forex futures volume in the 1HFY2022, as USD/CNH futures and INR/USD futures contact volumes grew 9.2% y-o-y and 3.4% y-o-y respectively.

“We reckon that the strong outperformance for the USD/CNH futures in 2021 (+4.2% y-o-y) was due to higher demand for risk-management caused by China’s tech crackdown and regulatory risks,” says Tan.

Commodity derivative volumes during the half-year period rose 17% y-o-y as forward freight agreements (FFA) (+90% y-o-y), petrochemicals (+28% y-o-y) and iron ore (+15% y-o-y) derivatives outperformed as well, he adds.

Projections for 1HFY2022

Ahead of SGX’s impending announcement, Tan took a closer look at the exchange’s semi-annual market statistics and pegged that it’ll report “flattish results” for the 1HFY2022. The results will be mainly dragged by cash equities, he adds.

In cash equities, Tan expects the normalisation to pre-Covid-19 levels to impact revenue, with a projected 3.9% y-o-y decline to $396.7 million, based on the lower securities daily average traded volume (SDAV) assumption of $1.28 billion in FY2022, compared to FY2021’s $1.35 billion.

“Similarly for 1HFY2022, based on 1HFY2022 market statistics, we expect 1HFY2022 revenue to post a 3-4% y-o-y decline, forming 48% of our FY2022 forecasts as securities turnover value dropped 7% y-o-y,” writes Tan. “Dependant on its success, newly anticipated SPAC listings in 2HFY2022 may help stem the overall decline in FY2022.”

In equity derivatives, Tan estimates that revenue will grow by 8.4% y-o-y to $312.5 million due to the higher average fee per contract assumptions from $1.33 to $1.40 per contract.

The average fee per contract increased to $1.45 in the 1QFY2022 from $1.43 in 4QFY2021, and $1.36 in 1QFY2021, notes Tan.

“This is likely due to the removal of introductory discounts implemented for the FTSE China A50 contracts. Although 1HFY2022 total contract volumes dipped by 0.5% y-o-y, we expect 1HFY2022 revenue to grow by 4-5% y-o-y due to higher margins, forming roughly 50% of our FY2022 forecasts,” he writes.

“SGX’s FTSE A50 volumes have remained robust in the face of competition with December 2021’s volumes outperforming (+8.5% m-o-m, +21.6% y-o-y) whilst HKEX’s MSCI A50 volumes have relatively underperformed in 1HFY2022,” he adds.

To this end, Tan has kept his FTSE A50 contract assumptions for the FY2022 at 91 million.

“[But we do] see some potential upside on robust 1HFY2022 volumes (50.5 million), barring stronger-than-expected volumes from HKEX’s China A50 Index Futures,” he continues.

Fixed income, currencies and commodities (FICC) derivatives are also another segment that’s set to outperform in the upcoming earnings announcement.

“Earmarked as a core revenue growth driver, we forecast FY2022 revenue from the currencies and commodities segment to increase 18.6% y-o-y, on the back of strong volumes in the USD/CNH and INR/USD futures as well as outperformance from FFA, iron ore and petrochemical derivatives,” says Tan.

“1HFY2022 fixed income revenue is poised to grow by $0.5-$1 million y-o-y due to larger amount of funds raised from bond listings. Overall, we expect 1HFY2022 revenue from this segment to grow 16-18% y-o-y, backed by an ongoing global economic recovery along with supply chain constraints,” he adds.

The data, connectivity and indices segment is also another reliable source of revenue for the exchange.

“Post-acquisition of Scientific Beta in FY2021, we expect 1HFY2022 revenue to grow 4-5% y-o-y, given growing secular demand for index tracking and ESG/thematic investing,” writes Tan.

Beneficiary of Fed interest rate hikes

Apart from the Singapore banking sector, SGX is set to be yet another beneficiary of the interest rate hikes from the US Federal Reserve.

The US Fed commented previously that it intends to raise interest rates by three to four times in 2022 on the back of record high inflation.

“In our view, we expect three rate hikes in 2022 with the first one likely in June. Although rising interest rates would help boost SGX’s treasury income, it would likely depress trading velocity and revenue from the cash equities segment,” says Tan.

“We have incorporated three interest rate hikes into our FY2023 assumptions which would raise our FY2023 earnings by around $20 million, a 4-5% y-o-y increase from our previous FY2023 forecasts,” he adds.

Upgraded earnings estimates

Amid the expectations of interest rate hikes and higher average fees for equity derivatives, Tan has upgraded his FY2022 to FY2024 earnings estimates to $437.8 million ($423.1 million), $468.9 million ($431.5 million) and $490.9 million ($438.8 million) respectively.

“We expect FY2022 earnings to moderate slightly by 1.7% y-o-y, dragged down by the cash equities segment, before increasing by 7.1% y-o-y and 4.7% y-o-y in FY2023-2024 respectively due to increased treasury income,” concludes Tan.

As at 3.36pm, shares in SGX are trading 8 cents lower or 0.83% down at $9.55, or an FY2022 P/B of 7.0 times and dividend yield of 3.4%.

Photo: Albert Chua/The Edge Singapore

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