SINGAPORE (Dec 20): Maybank Kim Eng is initiating coverage on Singapore Exchange (SGX) with a “buy” call and a target price of $8.30.
“SGX is a good proxy to ride the cyclical upturn,” says analyst Ng Li Hiang in a Wednesday report. “We see support from its strong cash position, healthy balance sheet and decent dividend yields of close to 4%.”
According to Ng, SGX’s earnings has scope to improve on the back of three main factors: a healthy market cap from a healthy IPO pipeline; a stronger momentum of securities daily average traded value (SDAV) from an improving economic outlook; and growth from SGX’s derivatives daily average volume (DDAV), which is likely to sustain on the back of higher open interest, expansion of its product offerings, and its ability to extend the derivatives value chain.
“We think derivatives will be a bigger revenue driver as we are positive that further growth can be sustained through its ability to extend the derivatives value chain through vertical integration and expansion of product offerings,” says Ng.
However, low turnover velocity, low valuations of companies and lack of bigger IPO listings are structural issues for its equities business.
The group’s management has come up with various initiatives to address these issues, but their effectiveness remains to be seen as more time is needed to assess their impact, Ng says.
Meanwhile, clearing fees are also likely to trend lower due to market makers and liquidity providers (MMLP) and proliferation of alternative products.
As for derivatives, concentration risks exist as volume growth is driven by key contracts, such as China A50 and iron ore. The group is also looking to diversify its volume and revenue mix through other products such as FX futures.
“We think SGX may defend and/or gain market share for its contracts from increased competition, which will result in lower fee per contract,” says Ng.
As at 11.20am, shares in SGX are trading at $7.41, or 7.2 times FY18 book with a dividend yield of 3.8%.
