Since rallying to multi-year highs in June 2021, shares of the Singapore Exchange have retreated 22.9% in the last 5 months, and is amongst the worst performing index constituents on the Straits Times Index. The stock is currently seeing consensus ratings that are mostly (93.8%) “Holds” and “Sells” on Bloomberg, with only one “Buy” rating.
That one “Buy” rating is from Macquarie Research (MQ), who has an Outperform rating on SGX shares. In a research piece released on 11 November 2021, MQ explains their rating and why they see a stock price catalyst for SGX in the trading months of November to December 2021…
• MQ hosted SGX’s CEO and CFO for a call with investors
• Key topics were FTSE A50 prospects in light of HKEx’s MSCI A50 futures product, decisions on the scrip dividend and new business growth prospects
• MQ reiterates their non-consensus Outperform rating and S$12.80/sh target. Key catalysts are Nov-Dec monthly volumes showing continued A50 resilience
Takeaways from MQ’s call with management and Oct monthly stats
SGX’s management were positive on the outlook for the business, addressing extensive investor questioning on A50 performance and capital management plans.
October monthly performance was mixed relative to MQ’s estimates. with continued lower equity velocity (39% in Oct, 41% in 4M2022) offsetting 30% gains in the Straits Times Index and leading to stagnant traded value (+1.5% year on year for 4M2022).
Key Topic discussed
• On A50s, the most contentious topic, SGX has not seen any impact to its own business following HKEx’s (388 HK – Not Rated) launch of MSCI A50 Futures. SGX has not seen any reduction in trade in A50, have seen no withdrawal of counterparts and in many cases see mirroring trades between HKEx and SGX by value (arbitrage). There is no plan to provide clearing discounts on the product, as SGX doesn’t see this as necessary whilst bid-ask spreads remain 1bp or lower (vs 3-8bp and more volatile for the MSCI A50 contract on HKEx). Month to date during November, MQ calculates HKEx share (by value) of A50 futures traded US$5.7 billion (16% share), with US$30.7 billion (84% share) for SGX.
• On scrip in lieu of dividends, management made the point they have heard investors’ and analysts’ concerns loud and clear. Scrip will be an option (rather than mandatory) for shareholders; as SGX doesn’t need the capital, it should be very low (or possibly even a zero discount). SGX is also open to buybacks as a form of capital return, which in MQ’s opinion could neutralise the impact of any new shares issued through scrip and be a positive.
Earnings and target price revision
• No change. MQ’s 22e eps is 5% above consensus.
• 12-month price target: S$12.80 based on a dividend discount model methodology.
• Catalyst: Nov-Dec monthly stats which MQ is expecting shows consistent volumes in A50 contracts, the 1H22 update in early CY22 showing progress in new ventures (mainly FX Over-the-counter products)
MQ the only buy on the stock at present
MQ’s $12.80 per share target assumes a $0.33/share dividends, no scrip dilution, 3.3% long-term growth and 6.2% cost of capital.