Rising global volatility could drive inflection
SGX’s 1H22 PAT missed MIBG expectations, but was in-line with Street. The Group’s derivatives, FX and commodities segments are delivering growth. Rising global uncertainty from rate hikes, Chinese domestic policy, inflation as well as regional re-opening should drive upside to volumes for SGX’s risk management solutions going forward, in our view. While we lower TP to SGD11.20 from SGD12.27 to account for weaker treasury earnings and lower peer multiples, with 19% upside, upgrade to BUY. Singapore’s increased relevance as a value-oriented investment destination should drive an inflection in performance, we believe.
Underlying business delivering growth
SGX missed largely on weaker than expected treasury income. This typically contributes around 9% of revenues, but in 1H22, it was 3%. Lower yields were to blame and re-pricing could take 6-9 months despite higher rate expectations going forward, according to Management. On the other hand, we note higher volumes in fixed income, FX, commodity derivatives as well as equity derivatives. Despite a competing product on the China A50 index futures introduced by HKEX (388 HK, HKD438.40, NR) in Oct,
income here expanded 10% Oct-Dec, according to Management, signifying the Group’s strong risk management offering.
Volatility, re-opening positive catalysts
Increased uncertainty from monetary tightening, the execution of China’s common prosperity policy and rising inflation are likely to increase demand for SGX’s derivative suite of products to manage risk. Concurrently, regional re-opening could drive higher demand for capital raising as well as hedging freight and commodity prices. The potential for Chinese and SE Asian homecoming listings choosing SGX as a neutral listing venue plus the stronger than expected reception for local SPAC-listings could support market velocity and fees going forward, in our view.
Lower TP to SGD11.20, but upgrade to BUY
Weaker treasury income and lower equity clearing fees (-2% YoY from higher market maker participation), sees us reducing FY22-24E PAT by 3- 13%. Our blended multi-stage DCF (WACC 7.2%, 1% terminal growth) and peer PE (26x target) TP is lowered to SGD11.20. SGX has underperformed so far this year. However, its value-orientation, risk management offering and potential to increase regional relevance as Covid re-opening progresses could support an inflection. At our TP, SGX would trade at 30x FY22E PE, still 9% cheaper than ASX (ASX AU, AUD84.31, NR), which is another largely value-oriented exchange. Upgrade to BUY with 19% upside.