1HFY22 Earnings Preview: Expect Flattish Results, Dragged By Cash Equities

With SGX’s 1HFY22 results announcement approaching, we reviewed SGX’s semiannual market statistics and adjusted our forecasts accordingly. Excluding the cash equities segment, we project yoy growth from the other segments based on strong 1HFY22 volumes. However, with SGX trading at its +1SD historical mean PE, we are cautious on the success of future growth initiatives and impact of A50 futures competition on earnings. Thus, maintain HOLD with a higher target price of S$9.74.

WHAT’S NEW

Continued downtrend in securities. Singapore Exchange’s (SGX) 2021 securities turnover value was down 8.2% yoy, coming off a high base in 2020. 1HFY22 (Jul 21–Dec 21) securities turnover value was at S$150.44b, down 7% yoy and 15.6% hoh. The downtrend was due to lower trading velocity in 2021 as compared to an elevated 2020 and we expect turnover value to continue trending downwards and bottom out to pre-COVID-19 levels (1HFY20: -10% yoy from 1HFY22) going into 2HFY22. Average clearing fee per contract for 1QFY22 was at 2.57 basis points, lower by 0.05 bps qoq and 0.17 bps yoy.

Derivatives volume steady. For 2021, derivatives contract volume was down 6.2% yoy. However, 1HFY22 volumes softened by only 0.5% yoy and increased 1.4% hoh. We reckon this is due to continued strong demand for risk-management tools and the steady growth in SGX’s FTSE China A50 Index Futures Contracts. For 2021, China A50 Index Futures Contract volumes grew 1% yoy while 1HFY22 volumes, undeterred by HKEX’s launch of its MSCI China A50 Index Futures in Oct 21, grew 3.5% yoy and 7.7% hoh to 50.5m.

Outperformance from forex and commodity segments. 1HFY22 forex futures volume rose 6.0% yoy as USD/CNH futures and INR/USD futures contract volumes grew by 9.2% yoy and 3.4% yoy respectively. We reckon that the strong outperformance for the USD/CNH futures in 2021 (+4.2% yoy) was due to higher demand for risk-management caused by China’s tech crackdown and regulatory risks. 1HFY22 commodity derivative volumes rose 17% yoy as forward freight agreements (FFA) (+90% yoy), petrochemicals (+28% yoy) and iron ore (+15% yoy) derivatives outperformed.

RESULTS PREVIEW

Cash equities: Normalisation to pre-COVID-19 levels to impact revenue. For FY22, we expect revenue from the cash equities segment to decline 3.9% yoy to S$396.7m, based on lower securities daily average traded volume (SDAV) assumptions of S$1.28b as compared to S$1.35b in FY21. Similarly for 1HFY22, based on 1HFY22 market statistics, we expect 1HFY22 revenue to post a 3-4% yoy decline, forming 48% of our FY22 forecasts as securities turnover value dropped 7% yoy. Dependant on its success, newly anticipated SPAC listings in 2HFY22 may help stem the overall decline in FY22.

Equity derivatives: Stable amid steady risk-management demand. For FY22, we expect revenue from equity derivatives to grow by 8.4% yoy to S$312.5m due to higher average fee per contract assumptions from S$1.33 to S$1.40 per contract. 1QFY22 average fee per contract increased to S$1.45 from S$1.43 in 4QFY21 and S$1.36 in 1QFY21. This is likely due to the removal of introductory discounts implemented for the FTSE China A50 contracts. Although 1HFY22 total contract volumes dipped by 0.5% yoy, we expect 1HFY22 revenue to grow by 4-5% yoy due to higher margins, forming roughly 50% of our FY22 forecasts. SGX’s FTSE A50 volumes have remained robust in the face of competition with Dec 21’s volumes outperforming (+8.5% mom, +21.6% yoy) whilst HKEX’s MSCI A50 volumes have relatively underperformed in 1HFY22. We have maintained our FY22 91m FTSE A50 contract assumption but do see some potential upside on robust 1HFY22 volumes (50.5m), barring stronger-than-expected volumes from HKEX’s China A50 Index Futures.

Fixed income, currencies and commodities derivatives: Outperforming segment. Earmarked as a core revenue growth driver, we forecast FY22 revenue from the currencies and commodities segment to increase 18.6% yoy, on the back of strong volumes in the USD/CNH and INR/USD futures as well as outperformance from FFA, iron ore and petrochemical derivatives. 1HFY22 fixed income revenue is poised to grow by S$0.5-1m yoy due to larger amount of funds raised from bond listings. Overall, we expect 1HFY22 revenue from this segment to grow 16-18% yoy, backed by an ongoing global economic recovery
along with supply chain constraints.

Data, connectivity and indices: Reliable source of revenue. Post-acquisition of Scientific Beta in FY21, we expect 1HFY22 revenue to grow 4-5% yoy, given growing secular demand for index tracking and ESG/thematic investing.

STOCK IMPACT

Beneficiary of interest rate hikes. With record high inflation, the US Fed has commented that they intend to raise interest rates by 3-4 times in 2022, which may arrive as early as Mar 22. In our view, we expect three rate hikes in 2022 with the first one likely in Jun 22. Although rising interest rates would help boost SGX’s treasury income, it would likely depress trading velocity and revenue from the cash equities segment. We have incorporated three interest rate hikes into our FY23 assumptions which would raise our FY23 earnings by around S$20m, a 4-5% yoy increase from our previous FY23 forecasts.

EARNINGS REVISION/RISK

Upward revision to our FY22-24 earnings to account for the anticipated interest rate hikes and higher average fees for equity derivatives. We have increased our FY22-24 earnings to S$437.8m (S$423.1m), S$468.9m (S$431.5m) and S$490.9m (S$438.8m). We expect FY22 earnings to moderate slightly by 1.7% yoy, dragged down by the cash equities segment, before increasing by 7.1% yoy and 4.7% yoy in FY23-24 respectively due to increased treasury income.

VALUATION/RECOMMENDATION

Maintain HOLD with a slightly higher PE-based target price of S$9.74 (previous: S$9.41). We have pegged our PE multiple to 23.8x FY22F earnings, +1SD of SGX’s historical forward PE. Given competition from HKEX’s MSCI A50 index futures offering, we remain cautious on the impact of competition on SGX’s future earnings. However, we think that the success of new exciting initiatives (OTC Forex offerings, government initiatives, depositary receipt linkages, SPACS) could re-rate SGX to trade similar to peers (29.6x).