Analysts mostly satisfied with SGX’s first-half results for now
Singapore Exchange’s (SGX) first-half earnings were weighed down by lower treasury income and weaker cash equities. However, some earlier worries appear overblown. Coupled with expectations that the exchange’s recent acquisitions may start contributing earnings meaningfully in the months to come, a few analysts have upgraded their calls accordingly.
Citi Research analysts Robert Kong and Tan Yong Hong issued the biggest rerating. In a Feb 7 note, Kong and Tan upgrade SGX to “buy” from “sell”, with an increased target price of $10.50 from $9.
For them, the “key positive” in the earnings report was the sequential improvement in unit average derivatives fees that have continued to rise despite new competition.
Specifically, the Citi analysts were referring to the trading of SGX’s China A50 contracts, which, since last October, have been offered by Hong Kong as well. Instead of a rapid loss of market share, Hong Kong’s piece of the overall pie for this product has stabilised at around 16%. “This is despite SGX not cutting contract pricing and indeed pricing has improved,” note the Citi analysts.
Nevertheless, they point out that the results were characterised by relatively muted cash equities turnover and derivative contract volumes while treasury income was also soft due to the low rates backdrop.
For the 1HFY2022 ended Dec 2021, SGX reported earnings of $219 million, down 8% y-o-y; adjusted earnings, which SGX says is a more accurate reflection of its underlying earnings, were down 2% y-o-y.
Revenue in the same period came in at $522 million, unchanged y-o-y. Costs rose 6% y-o-y to $262 million while operating profit came in 7% lower y-o-y at $260 million.
Maybank Singapore Securities’ Thilan Wickramasinghe has upgraded his call to “buy” from “hold” but lowered his target price to $11.20 from $12.27. The “weaker than expected” treasury income typically contributes around 9% of revenues but was just a third of that in 1HFY2022.
“Lower yields were to blame and re-pricing could take six to nine months despite higher rate expectations going forward, according to SGX,” writes Wickramasinghe in a Feb 6 note.
He adds: “SGX’s 1HFY2022 profit after tax (PAT) missed Maybank’s expectations, but was in line with [the] street. The group’s derivatives, foreign exchange (forex) and commodities segments are delivering growth. Rising global uncertainty from rate hikes, Chinese domestic policy, inflation as well as regional reopening should drive upside to volumes for SGX’s risk management solutions going forward, in our view.”
OCBC Investment Research is calling a “buy” on SGX with a higher target price of $10.40 from $10.20. “SGX remains focused on its strategy to advance its multi-asset exchange platform, widen its partnership network and grow its international presence to increase the diversification of its revenues over the medium term,” writes its research team in a Feb 7 note.
Conversely, UOB Kay Hian Research’s Llelleythan Tan is maintaining a “hold” on the counter but with a lower target price of $9.09 from $9.74 previously. While 1HFY2022 earnings came in within Tan’s expectations, the results were nonetheless “muted”, he writes in a Feb 8 note. “Although SGX’s underlying businesses are stable and growing, we do not see any near-term catalysts to justify a re-rating.”
CGS-CIMB Research analyst Andrea Choong’s takeaway from the earnings report is that SGX is, on one hand, “steadying the ship” but at the same time, poised to enjoy earnings contribution from recent acquisitions like Scientific Beta, BidFX and MaxxTrader as they gain scale. In her Feb 5 note, Choong is keeping both her “add” call and $10.40 price target.
Similarly, Jefferies Research analyst Krishna Guha is maintaining both his “buy” rating on SGX and his target price of $10.80. He believes that despite the drop in earnings, fundamentals will improve in 2HFY2022 and beyond. “Spacs/new listings should boost cash average daily trading volume. Higher rates would help treasury income while SGX continues to demonstrate leadership in derivatives. SGX is gaining market share in FX, which in turn should improve efficiencies and margins,” writes Guha in a Feb 7 note.
While both DBS Group Research and RHB Group Research analysts maintain their ratings and target prices for SGX, they highlight a few drags on performance ahead.
Lim Rui Wen of DBS has a “hold” call and a $10.20 target price while RHB’s Shekhar Jaiswal remains “neutral” with an unchanged target price of $9.80.
Writes Lim: “We remain more conservative on our earnings estimates, bearing in mind that preceding years saw good traction in equities and derivatives due to heightened market volatility.”
Jaiswal notes a few key near-term risks. Firstly, SGX has flagged that operating costs will continue to increase within the current FY2022. “We believe revenue contribution from recently-acquired businesses could take time to scale up.”
Next, while SGX remains confident of market size expansion for its FTSE China A50 Index Futures, Jaiswal foresees the risk of elevated competition from Hong Kong Exchange’s MSCI China A50 Connect Index Futures.
Also, with the full induction of home-grown gaming and e-commerce giant Sea as a component stock of MSCI Singapore in 1Q2022, there is a risk that securities turnover, already soft for 1HFY2022, could moderate further. This is because investors sticking closely to Singapore market indexes are compelled to allocate more weightage to New York-listed Sea and less towards SGX-listed counters.