UOB Kay Hian analyst Llelleythan Tan has kept his “hold” recommendation on Singapore Exchange (SGX) as he sees the exchange as “fully valued” at its current price levels with no major potential upside.
In his report dated March 30, Tan says he remains cautious on the impact on SGX’s earnings from the competition from the Hong Kong Exchange (HKEX) and sliding securities daily turnover value (SDAV).
“We think significant revenue from new initiatives such as SGX’s FX ETC network and Special Purpose Acquisition Company/Companies would take time to gestate and major success from these initiatives could re-rate SGX to trade similar to peers’ average (28.6x),” he writes.
That said, the analyst has upped his target price to $9.33 from $9.09 previously, pegging it to an FY2022 P/E multiple of 23.7x, +1 standard deviation of SGX’s historical forward P/E.
In February, SGX reported 21.1% y-o-y and 35.9% m-o-m growth in its SDAV in February.
The higher SDAV, despite three fewer trading days during the month, was attributable to the upcoming interest rate hikes at the time, the elevated risks of inflation, as well as geopolitical tensions between Russia and Ukraine.
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Heavily traded in-favour stocks such as Rex International Holding and Samudera Shipping Line also contributed to the outperformance, notes Tan.
In addition, derivatives daily average volume surged to nearly two-year highs since March 2020 driven by an increased demand for risk-management tools amid heightened volatility.
Both forex and commodity derivatives also outperformed in February amid the heightened volatility around the world caused by the Ukrainian war and SGX’s commanding market share in key product markets.
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In his report, Tan also notes that geopolitical events or crises historically favour the SGX as SDAV and DDAV volumes are directly proportionate to greater trading volatility.
“The recent Ukraine-Russia conflict has increased SDAV and DDAV volumes as investors weigh in new risks to the global world order,” Tan writes.
“Looking back to statistics from 2012, both SDAV and DDAV increased sharply after events occurred. However, over time, SDAV generally softens after two to three quarters as investors start to fully grasp associated geopolitical risks with trading volatility which will then subside,” he adds.
“On the other hand, DDAV has actually gradually trended upwards after geopolitical events. We reckon that this is due to investors becoming more sophisticated, leading to increasing demand and adoption for risk-management products such as derivatives,” Tan continues.
Given the challenging macro-economic environment and uncertain geopolitical outlook, Tan expects SGX to see an increase in DDAV moving forward.
“We opine SDAV would soften in the coming months while DDAV continues its uptrend, unchanged from our previous expectations,” he says.
The higher benchmark interest rate raised by the Fed in March is also expected to come with higher treasury income.
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The higher treasury income may see a significant boost some time in 2HFY2023 or 1HFY2024, given that there is usually a time lag of six to nine months, says Tan.
Re-rating catalysts include secondary listings of foreign-listed entities on the exchange, as well as a longer-than-expected period of trading volatility, he adds.
Shares in SGX closed 7 cents higher or 0.71% up at $9.89 on March 30.
