UOB Kay Hian analyst Llelleythan Tan has upgraded Singapore Exchange (SGX) to “buy” as he expects the group to post “robust results” for the FY2022 ended June.
The analyst has also lifted his target price estimate to $11.09 from $9.55 previously.
“With SGX trading below its historical P/E mean, we think that there is upside at current price levels as volatility persists,” he writes in his report dated July 20.
SGX will be reporting its full-year results before the market opens on Aug 18.
“With SGX’s FY2022 results approaching, we reviewed SGX’s annual market statistics and adjusted our forecasts accordingly,” Tan says.
“SGX is set to post strong 2HFY2022 results as, excluding the cash equities segment, we project solid growths from the other segments based on sturdy FY2022 volumes,” he adds.
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In the FY2022, the group saw securities turnover value fall by 5.7% y-o-y, although this was mitigated slightly by a strong 2HFY2022, the analyst notes.
During the six-month period, SGX saw securities turnover value rising 13.2% h-o-h, which was caused by increased volatility from the Russo-Ukraine war, along with rising inflation.
However, turnover value for the 2HFY2022 fell 4.5% y-o-y, continuing its overall downtrend, the analyst adds.
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“We expect the downward trend to continue as fears of an upcoming recession and record-high inflation would depress securities trading activity,” says Tan.
Cash equities to fall 6% to 7% y-o-y
In cash equities, Tan expects FY2022 revenue for the segment to decline 6% to 7% y-o-y to $389.2 million. This is based on the lower securities daily average volume (SDAV) assumptions of $1.28 billion compared to FY2021’s $1.35 billion.
Based on SGX’s market statistics for the 2HFY2022, Tan expects revenue for cash equities in 2HFY2022 to grow slightly by 4% to 5% h-o-h due to higher trading and clearing revenue from elevated trading activity.
On a y-o-y basis, however, 2HFY2022 revenue for cash equities is also likely to fall between 6% to 7% y-o-y.
In Tan’s view, positive upside may come from higher revenue contribution from new listings and exchange-traded funds (ETFs)/warrants/daily leverage certificates (DLCs).
Equity derivatives expected to grow by 7% to 8% y-o-y led by China A50
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In FY2022, SGX saw a “robust” volume for its derivatives products. During the year, total derivatives contract volume rose 6.8% y-o-y. Demand for risk-management surged in the 2HFY2022 with a 14.2% y-o-y and 12.7% h-o-h growth due to heightened volatility.
“Total FY2022 volumes for FTSE China A50 Index Futures Contracts grew 9.1% y-o-y, an impressive showing despite competition from HKEX while other equity-linked futures such as MSCI Singapore Index (+14.7% y-o-y), FTSE Taiwan Index (+11.7% y-o-y) and Nifty 50 Index (+14.4% y-o-y) increased as well,” notes Tan.
As such, the analyst is expecting revenue from equity derivatives to grow by 7% to 8% y-o-y in the FY2022 to $310.7 million. This will be attributable to the higher average fee per contract, which is around $1.52 in the FY2022 compared to $1.34 in the year before.
“Potential upside may come from earlier-than-expected increase in treasury income from the recent interest rates hikes, although this is unlikely given the six to nine months’ time lag,” he says.
FICC expected to grow 23.2% y-o-y
During the year, SGX’s foreign exchange (forex) and commodity segments (FICC) outperformed, with a 10.4% y-o-y growth. This was led by the US dollar (USD)/Chinese yuan (CNH) and Korean won (KRW)/USD futures contract, which grew 22.2% y-o-y and 138.7% y-o-y respectively.
“2HFY2022 saw record-high forex volumes (+13.6% y-o-y, +26.5% h-o-h) as ongoing global macroeconomic uncertainty increased demand for risk management,” says Tan. “Total FY2022 commodity derivative volumes also grew 21.3% y-o-y, led by iron ore derivatives (+22.7% y-o-y) and forward freight agreement derivatives (+29.1% y-o-y).”
The analyst has forecast the segment to record a 23.2% y-o-y growth for the FY2022.
“The consolidation of Maxxtrader acquisition in January is expected to boost forex trading and clearing revenue for 2HFY2022,” says Tan.
“For commodity derivatives, outperformance from forward freight agreements, iron ore and petrochemical derivatives also drove volumes higher amidst ongoing global supply chain issues,” he adds. “The introduction of dairy derivatives was also a welcome boost as trading volumes have grown steadily.”
DCI a ‘reliable source of revenue’
SGX’s data, connectivity and indices segment is expected to see revenue grow 4% to 5% y-o-y in FY2022 after the acquisition of Scientific Beta in the FY2021. According to Tan, this is due to the growing secular demand for index tracking and environmental, social and governance (ESG)/thematic investing.
Interest rate hikes ‘mixed blessing’
The interest rate hikes from the US Federal Reserve (US Fed) may prove to be somewhat of a “mixed blessing” for SGX, says Tan.
On the one hand, the rising interest rates mean a “significant boost” in treasury income from the 2HFY2023 onward. That said, that may depress securities trading volumes and impact the cash equities segment in the FY2023, he adds.
The US Fed is expected to continue raising rates going into the 1HFY2023 with another 0.75% rate hike expected in July.
The US Fed has already raised interest rates three times in 2022.
Increased earnings estimates
On the back of the strong results from SGX’s equity derivatives and FICC segments as well as higher treasury income assumptions, Tan has increased his earnings estimates for the FY2022 to FY2024 by 3% to 4%.
The analyst is expecting SGX to report earnings of $449.7 million for the FY2022 from $431.1 million previously. In FY2023, SGX is expected to report earnings of $504.7 million from $486.3 million previously. For the FY2024, the group is expected to see earnings of $553.2 million from $539.0 million previously.
Revenue for the FY2022 is expected to increase by 5.2% y-o-y, while net profit is expected to increase by 8.6% y-o-y. In FY2023, Tan is pegging a revenue growth estimate of 1.0% y-o-y, while net profit for the year is expected to grow by 12.2% y-o-y.
“Robust contributions from FICC and equity derivatives are set to continue in FY2023 due to volatile macroeconomic conditions whilst higher treasury income from interest rate hikes is expected to start from 2HFY2023,” he says.
“With a moderate yield of [around] 3%, we like SGX for its resilient business model that benefits from global economic uncertainty,” he adds.
Shares in SGX closed 5 cents higher or 0.51% up at $9.85 on July 20.
