Singapore Exchange Group

Price targets:

Citi Research ‘sell’ $9

Maybank Securities ‘hold’ $10.09 OCBC Investment Research ‘hold’ $10.16 CGS-CIMB Research ‘hold’ $10.50

At the crossroads

The Singapore Exchange’s (SGX Group) adjusted net profit of $251.4 million for 1HFY2024 ended Dec 31, 2023, came in below the expectations of some analysts.

In addition, given how trading volume is not forecast to pick up in a big way yet, they have mostly maintained their calls to “hold” the stock.

Underlying profit came in at 47% of Citi Research’s full-year forecast for SGX’s FY2024 ending June 30. This was due to a “softer top line”, says Citi analyst Tan Yong Hong, but the drivers are “unclear” as SGX has reclassified its operating segments.

In a Feb 1 note released before SGX’s results briefing that morning, Tan has a “sell” call on the bourse operator with a $9 target price. SGX has adopted four new operating segments from 1HFY2024: fixed income, currencies and commodities (FICC); cash equities; equity derivatives; and platform and others.

Up until FY2023, SGX had classified revenue under three segments: FICC; equities; and data, connectivity and indices.

A surge in treasury income drove SGX’s results for 2HFY2023 ended June 30, 2023, to beat expectations but the h-o-h trajectory is unclear due to the reclassification, writes Tan.

The daily average value for cash equities fell 14% h-o-h and 12% y-o-y to $962 million in 1HFY2024 while revenue fell 6% y-o-y. Total derivative contracts rose 6% h-o-h and 1% y-o-y.

SGX’s operating expenses came in softer, as expected, says Tan. 1HFY2024 opex fell 8% h-o-h but rose 4% y-o-y, which came in at 46% of Citi and FY2024 estimates by consensus. SGX has also lowered its FY2024 opex guidance to 3% from the mid-single-digit opex growth forecast given at the last results briefing.

Maybank Securities analyst Thilan Wickramasinghe is a tad more optimistic. He is maintaining a “hold” on SGX with a lower target price of $10.09, down from $10.24 previously. SGX is “at a crossroads”, says Wickramasinghe in his Feb 1 note, citing its “low yield and slow growth”.

SGX has declared an interim quarterly dividend of 8.5 cents per share, payable on Feb 20. This brings total dividends in 1HFY2024 to 17 cents per share. SGX raised its quarterly dividend to 8.5 cents at the release of its results for FY2023 ended June 2023, ending 12 consecutive quarterly payouts of 8 cents. At the latest briefing, CEO Loh Boon Chye reiterated his plan to maintain “mid-single-digit” CAGR growth in dividends over the medium term.

Wickramasinghe says SGX’s 1HFY2024 dividends were below expectations. “Management is guiding for mid-single-digit DPS growth in the medium term, partly as a means to preserve dry powder for M&A.”

However, SGX’s past M&A are still integrating and have yet to make material contributions, he adds. “As a result, the value proposition as a growth stock versus a yield stock (just 3.8% FY2024 yield versus 5.7% for the Straits Times Index) is unclear at this time, in our view.”

Writing in a Feb 1 note, OCBC Investment Research says the results came in within expectations and has kept its “hold” call and $10.16 target price.

OCBC says SGX’s management reiterated their target to grow the dividend payout by a CAGR of mid-single-digit percentage range over the medium term, subject to its earnings growth trajectory.

On the other hand, SGX has guided for FY2024 costs to increase at a lower magnitude of 3% from “mid-single” digits previously.

OCBC also notes that capex guidance has been lowered from $75 million–$80 million to $70 million–$75 million. “We believe this reflects the effectiveness of SGX’s cost controls and this will also help to support its ability to grow its dividends.”

SGX’s balance sheet showed a net cash of $258.9 million, down from $341.3 million as at September 2023. Nonetheless, OCBC still deems this “healthy”, given how gross debt to ebitda stood at 1.0 time as at end 1HFY2024, lower than the same period a year ago (1.1 times).

Andrea Choong of CGS-CIMB says the results missed her expectations, partly due to lower-than-expected treasury income even with interest rates elevated. However, the interim dividend of 8.5 cents came in within her expectations.

In her Feb 1 note, Choong has kept her “hold” call with a slightly reduced target price from $10.60 to $10.50 to take into account weaker-than-expected treasury income.

Her target price of $10.50 is pegged to 22 times earnings, a level that is SGX’s 10-year mean. As interest rates are still held high, Choong expects trading volume to remain weak. “Dwindling treasury income when US Fed rate cuts set in is a downside risk,” she warns. —