No immediate catalysts

Investment Thesis: 

Maintain HOLD; no immediate catalysts. While SGX saw good contributions from all business segments in last two years, including from equities and fixed income, currencies and commodities (FICC) on the back of heightened market volatility, we maintain our HOLD call, as we believe there are no immediate catalysts for the stock, with 1HFY22 equities and derivatives volumes performance mixed.

Competition risks. SGX’s FTSE China A50 Index futures, which used to be the only offshore China A50 futures, accounting for c.40% of SGX’s total derivatives volumes, now sees competition from HKEX’s MSCI China A50 Connect index futures, which is gaining market share. Should HKEX continue to gain market share, there is potential earnings risk for SGX as well.

Keep watch on next phase of growth. We continue to monitor the execution of newly acquired Scientific Beta and BidFX as SGX sets its sight on doubling revenues from Data, Connectivity, Indices (DCI) and FICC in the next four years. 

Potential catalysts: Higher-than-expected growth in securities daily average value (SDAV), and FICC and DCI are re-rating catalysts.

Valuation:

Maintain HOLD, TP $10.20. We maintain HOLD, TP $10.20, representing c.24x one-year forward PE which is +1S.D. above its five-year historical mean. Our TP is based on the dividend discount model (k=7%, g=3%, ROE=37%). We revised our FY22-23F earnings to incorporate company’s guidances.

Where we differ:

We remain more conservative on our earnings estimates, bearing in mind that FY20-1H21A saw good traction in equities and derivatives due to heightened market volatility.

Key Risks to Our View:

Competition in derivatives business. Any competition from HKEx in the derivatives space may affect SGX’s derivatives earnings directly.