Singapore Exchange Ltd (SGX SP) – 1H FY022 largely in line
• Stable top line growth with improved unit average fees for derivatives, which was achieved despite increased China A50 contract competition, and softer equity turnover and derivative volumes.
• SGX’s China A50 contract volumes appear to be stabilizing with estimated market share of ~84%, a positive given this was achieved without price cuts and likely supported by the strength of its product
suite across different asset classes.
• Fair value is lifted to SGD10.40. SGX remains focused on its strategy to advance its multi-asset exchange platform, widen its partnership network and grow its international presence, with the goal to increase diversification of its revenues over the medium term.
1HFY2022 results were largely in line, no scrip dividend in FY22 – 1HFY2022 revenues of SGD522mn was stable from a year ago (+0.2% yoy) while group NPAT of SGD219mn declined 9% yoy. Dividend of 16cts/share was in line, with guidance that scrip dividend will not be introduced in FY2022, a positive given previous share price reaction.
Adjusting for non-cash and non-recurring items, adjusted revenues and group NPAT of SGD501mn and SGD222mn gained 6% and fell 3% respectively. Recent bolt-on acquisitions (Scientific Beta and BidFX) accounted for about 8% of revenues with lower margins (38% vs group blended margin of ~59% for 1H). Adjusted NPAT included SGD16.7mn net re-measurement gain on BidFX a year ago, and SGD5mn writeback of earnout contingent consideration for BidFX in 1H.
FICC and DCI accounted for ~36% of overall topline. 1HFY2022 SDAV declined 7% yoy, with strength in
FICC (+15% yoy) helping to offset weaker performance in equities. Average fees per contract for equity, currency and commodity derivatives rose 19% from a year ago to SGD1.27 with higher proportion of full fee paying clients and some rollback of discounts provided, while average securities clearing fee fell 4% to 2.6bps. Total traded value of cash equities declined 7% to ~SGD150bn on lower trading activities. Treasury
income was impacted negatively due to lower yields (pressure looks likely to continue this year), although the pace of treasury income decline slowed in 1H FY2022 (~SGD21mn, versus 2HFY2021’s SGD26mn and 1HFY2021’s SGD48mn).
Expenses was up 6% to SGD262mn, largely driven by staff and technology costs. Adjusted total expenses excluding BidFX and Scientific Beta (SB) would have increased 5% to SGD227mn. 1H2022 EBITDA margins fell 3 ppt to 59%, with combined EBITDA margin for SB and BidFX improving from 37%
to 38%.
Management retained expense guidance for the year even with the inclusion of MaxxTrader (previous guidance excluding MaxxTrader was SGD565-575mn). Expected 2022 expenses after stripping out MaxxTrader is expected to be SGD13mn lower than previously expected, reflecting disciplined cost management despite inflationary pressures. MaxxTrader acquisition was completed in January 2022 and is expected to contribute about SGD25mn to opex yearly. Overall, management expects FY2022 expense to be stable or marginally higher versus FY2020. Management observed that BidFX’s performance so far has
exceeded expectations at the point of acquisition. Over the past two years, SGX has made close to SGD1bn of acquisitions and investments, with growth investments held at gross carrying value of SGD0.55/share (or about SGD600mn). Gross debt/ebitda ratio ~1.4x (increased from 0.9x in FY2021), with further headroom towards 2x.
While still evolving, SGX’s China A50 contract volumes appears to be stabilizing with estimated market share of ~84%, which was achieved without price cuts and likely supported by the strength of its product suite across different asset classes. A key encouraging observation is that this was achieved despite SGX not reducing contract pricing (SGX fee is ~2x that of HKEx). In addition, with higher open interest (OI) in SGX FTSE China A50 and HKEx benchmark China OI since October 2021, the overall market appears to have expanded. Our view remains that while some concerns remain from the increased competition from HKEx’s A50 product (launched from 18th October 2021), the overall market should continue to grow over time. SGX is also expected to continue mitigating the impact from ongoing efforts to diversify its revenue mix and growth drivers.
Fair value is lifted to SGD10.40 implying 22.6x forward PER (close to +1 s.d. to its 10Y historical average multiple). Looking ahead, the firm remains focused on executing its core strategies to advance its multi-asset exchange platform, widen its partnerships and network and grow its international presence, which bodes positively for future earnings stream. SGX remains focused on building up its non-equity business (FICC and DCI) to diversify its portfolio. Foreign exchange business will be one of the company’s key growth drivers, following the acquisition of BidFX (multi-dealer streaming platform), Maxxtrader (complements BidFX with its direct streaming capabilities) and establishment of ECN (introducing anonymous pools of trading). It is currently a meaningful player in the bond market, and plans to continue to form partnerships (be it contracts jointly traded/connects etc) and to expand its international presence to up-sell to existing clients or expand its client base.
ESG updates
SGX ESG rating pegs the firm at the top of its industry peers and is incorporated in our fair value via a valuation premium to its historical average multiple. Its ESG rating is driven by a strong governance structure and pegs SGX at the top tier amongst global industry peers. Key positives include ongoing efforts to expand its product suite and market hedging activities expected in a sustained low-rate environment. The solid rating is driven by the firm’s strong governance structure through board oversight and positive track record in productivity and morale issues, which the firm maintains through staff training and employee engagement surveys. SGX’s board has an independent majority, separate CEO and
chairman roles, independent chairman and female directors representation. Executive pay is also reviewed independently, with clawback provisions to curtail governance risks. Policies are also in place to pre-empt business malpractices.
First Asian exchange to commit to 1.5°C-aligned science-based emission reduction targets – SGX has announced in mid July 2021 its commitment to a 42% reduction in Scope 2 emissions by FY2031 from the base as at FY2021 (July 2020 to June 2021), pledging to set science-based emissions reduction targets that are consistent with keeping global warming to 1.5°C above pre-industrial levels. For Scope 3 emissions, the company will engage its colocation data centre supplier for them to set science-based targets within five years. The commitments are based on the criteria and recommendations of the Science Based Targets initiative (SBTi-collaboration between CDP, UN Global Compact, World Resources Institute/WRI and World Wide Fund for Nature/WWF), making SGX the first Asian exchange to join Race to Zero and Business Ambition for 1.5°C. SGX will submit its verifiable targets to SBTi for validation. Its Scope 1 emissions(direct emissions from owned/controlled sources) are less than 2% of combined Scope 1 & 2 (indirect from generation of electricity/steam/ heating/cooling consumed by reporting company)
emissions and are excluded fro targets due to immateriality. Planned initiatives to achieve the Scope 2 reductions include: improving the energy efficiency and reducing the carbon intensity of our data processing requirements in line with best practices, introducing energy-efficient equipment, processes and policies, and; purchasing Renewable Energy Certificates that meet the Scope 2 greenhouse gas (GHG) Protocol quality criteria through its subsidiary Energy Market Company. BUY. (Research Team)