Singapore Exchange

Price target:

SGX’s ‘volatile times’ could imply short-term benefit

RHB Group Research Shekhar Jaiswal has kept a “neutral” rating on Singapore Exchange (SGX) with an increased target price of $10, from $9.80.

“While we are positive on SGX’s long-term growth prospects from its latest acquisitions and potential pipeline of new listings, we remain concerned about the lack of near-term re-rating catalysts,” he writes. The analyst notes that continued global macroeconomic uncertainty could in fact lead to better-than-expected trading volume in the near term.

With the continuing Russia-Ukraine crisis causing elevated geopolitical tensions, this has in turn created heightened price volatility in global equity markets, with SGX seeing increased trading activity in February.

The securities daily average value (SDAV) increased 21% y-o-y to $1.6 billion, bringing the YTD SDAV to $1.2 billion for FY2022 ending June, in line with the analyst’s FY2022 SDAV estimates of $1.2 billion. SGX’s derivatives segment also saw an uptick in trading activity, with the average daily trading volume (DDAV) of 1.03 million.

In addition, the US Federal Reserve has started the cycle for higher interest rates with a 25 basis points (bps) interest rate hike in the Federal Funds Rate in March. Jaiswal expects another five to six interest rate hikes this year that could create scope for higher treasury income for SGX.

However, Jaiswal has some concerns as the exchange’s cost is “elevated”. Meanwhile, revenue contribution from its recent acquisitions could take time to scale up. There also appears to be stiffer competition from Hong Kong Exchange’s bid to grow its derivatives business which risks taking away trading volume from SGX.

Finally, with the full induction of New York-listed Sea into MSCI Singapore, securities market turnover could remain soft as some trading volume could move away from SGX-listed stocks to Sea.

On the other hand, Jaiswal foresees a number of upside risks that include higher-than-estimated trading volume from the potential pipeline of ETFs, REITs and spac listings. Overall, the analyst views the stock’s valuation as “reasonable” amid modest earnings growth, as it is trading at an FY2022 P/E of 23.4x, above its historical average, while offering a modest yield of 3.3% that is lower than the Straits Times Index’s yield of 4%. — Chloe Lim