Steadying the ship
? 1HFY6/22 core net profit of S$222m was in line with our/consensus estimates. Key drag was subdued treasury income and weaker cash equities.
? SGX’s A50 volumes have sustained through the introduction of HKEX’s competing product – a key positive. SB and BidFX contributions are growing.
? Reiterate Add. Sustained market volatility should support hedging activity and stronger derivatives volumes. Fed hikes are key to treasury income recovery.
1HFY6/22 FICC and derivatives gains offset by low treasury income
SGX reported 1HFY6/22 core net profit of S$222m (adjusted for one-off remeasurement gain and writeback consideration for BidFX, +7% hoh, -3% yoy). This was in line with our/consensus forecasts and formed 49% of FY22F estimates. 1HFY6/22 revenue was flattish yoy as stronger performances from the fixed income, currencies and commodities (FICC) and equities derivatives segments were completely offset by w eaker treasury income (due to the low interest rate environment) and softer cash equities trading volumes (7% yoy decline in total traded value to S$150bn). EBITDA margin slid 3%pt yoy to 59% in 1HFY6/22 on the back of higher opex (largely staff-related) and as Scientific Beta (SB) and BidFX gain scale (lower margins vs. SGX group). Adjusting for SB, BidFX and treasury income, SGX’s underlying EBITDA margin would instead be 1%pt lower yoy. SGX declared interim DPS of 8 Scts in 2QFY6/22, bringing 1HFY6/22 DPS to 16 Scts. Implementation of its scrip dividend scheme is put on hold.
FICC upside to come from scaling up of SB, BIdFX and MaxxTrader
The strength in FICC came on the back of stronger commodities and currency volumes (FX ADV +46% yoy to US$57bn), and higher contributions from BidFX. Collectively, revenue from BidFX and SB rose c.20% yoy to S$40m in 1HFY6/22. FICC now accounts for a larger c.22% of revenues in 1HFY6/22 (FY6/21: c.20%). The acquisition of MaxxTrader w as completed in Jan 22; at full speed, this could raise FX ADV by c.20-25%.
SGX’s A50 volumes and open interest sustained
Equity derivatives gained from a higher average fee per contract of S$1.50 in 1HFY6/22 (1HFY6/21: S$1.27) due to a larger proportion of full-fee paying customers in China and a normalisation of its Taiwan index futures post-MSCI departure. SGX’s average China A50 index futures volumes rose 16% yoy in 2QFY6/22 and open interest has sustained since the introduction of HKEX’s competing product in Oct 21. We expect SGX’s competitive advantage of deep liquidity to support A50 volumes (and a larger addressable market) going forward, but caution for a dip in market share as HKEX’s product gains traction.
Reiterate Add with TP of S$10.40
We expect earnings upside to come from SB, BidFX and MaxxTrader as they gain scale. Market volatility should also bode well for SGX’s derivatives segment. Incoming Fed rate hikes should also spur portfolio rotation volumes and stronger treasury income, albeit with a time lag. Our TP of S$10.40 is pegged to 25x CY22F P/E, c.1 s.d. above 10-year mean.