1HFY22: Mixed Results As Derivatives Outperform, Dragged Again By Treasury Income
SGX reported lower 1HFY22 net profit, down 8.7% yoy as lower treasury income and trading velocity affected overall revenue. Excluding treasury income, the currencies, commodities and equity derivatives segments posted robust double-digit revenue growth as demand surged. Although SGX’s underlying businesses are stable and growing, we do not see any near-term catalysts to justify a re-rating. Maintain HOLD with a lower target price of S$9.09 (S$9.74).
RESULTS
• Muted 1HFY22 earnings within our expectations. For 1HFY22, Singapore Exchange (SGX) reported revenue and net profit of S$521.6m (+0.2% yoy) and S$219.0m (-8.7% yoy) respectively, forming 47/50% of our FY22 estimates. Excluding treasury income and positive one-off adjustments from SGX’s 1HFY21 acquisition of BidFX, SGX’s 1HFY22 underlying core business revenue would have grown 6.0% yoy while net profit would have only softened 3% yoy. Operating profit dropped 4.8% yoy on 5.6% higher yoy operating expenses as overall headcount increased. SGX declared 1HFY22 dividend of 16 S cents, same as
1HFY21. SGX management has no plans to introduce a scrip dividend scheme in FY22 and would reassess the scheme at a later date.
• Mixed segmental performance. SGX’s core revenue growth driver, fixed income, currencies, commodities (FICC) segment, posted a strong 14.9% yoy revenue growth as commodities and currency derivative volumes grew 11.8% yoy. Cash equities segmental revenue dropped 5.2% yoy as securities daily average traded value (SDAV) fell 8% yoy. The underperformance is expected coming off elevated trading volumes in FY21 and is expected to continue declining moving forward. Equity derivatives segmental revenue softened 4.0% yoy as 1HFY22 equity derivative volumes fell 4.0% yoy. Excluding treasury income, equity derivatives trading and clearing revenue surged 18.7% yoy as 1HFY22 China A50 Index Futures volumes grew 3.5% yoy and average fee per contract increased to S$1.50 (S$1.27). Data, Connectivity and Indices (DCI) revenue rose 3.4% yoy, on the back of growing secular trend into ESG/thematic investing.
• Equity derivatives: Robust performance, dragged again by treasury income. 1HFY22 revenue formed 46.0% of our FY22 forecasts, slightly missing our expectations. Underperformance was mainly contributed by a sharp fall in treasury income than previously expected. Treasury income fell sharply by 68.0% yoy to S$12.5m, forming only 20.3% of our FY22 forecasts. However, the rate of decline for treasury income is expected to slow down and upcoming interest rate hikes in 2022 would boost treasury income starting 2HFY23. 1HFY22 equity derivatives trading and clearing (T&C) revenue of S$131.3m (+18.7% yoy) outperformed, forming 52.3% of our FY22 forecasts. This was largely due to the removal of introductory discounts implemented in 1HFY21 and higher open interest across all equity derivative products, resulting in an average higher fee per contract of S$1.50 (S$1.27).
• Management is positive on SGX’s FTSE China A50 Index Futures growth and noted that the overall market and interest is growing steadily due to healthy competition from HKEX’s MSCI China A50 Index futures. 1HFY22 volumes for SGX’s China’s A50 futures grew 3.5% yoy to 50.5m contracts despite competition from HKEX starting in Oct 21. We reckon that SGX’s commanding market share, strong liquidity on its exchange and multi-asset offerings have helped SGX retain its clients and market share. Although these are early days, we are mindful of the impact from HKEX’s A50 offering but reckon it would be a multi-year affair before we see significant impact on earnings.
• Cash equities: Free rolling downhill. Revenue from cash equities missed expectations, forming 48.1% of our full-year forecasts at S$190.7m (-5.2% yoy), dragged down by lower T&C revenue at S$100.8m (-9.6% yoy) which formed 47.4% of our FY22 forecasts. As SDAV normalises from elevated levels in FY21, we expect the cash equities segment to continue its downtrend going into 2HFY22. Total traded value fell 7.0% yoy in 1HFY22 to S$144.7b. We expect 2HFY22 total value to decline further to pre-pandemic levels at S$135-140b. Also, 1HFY22 average clearing fees for cash equities fell 4.0% yoy to 2.66bpts (2.77bpts) with overall turnover velocity falling to 39% from 49% a year ago. Looking forward, upcoming interest rate hikes as well as global economic uncertainty may supress SDAV while newly listed SPAC listings/ETFs may stem the ongoing decline in FY22.
• FICC: Exciting growth ahead. In line with expectations, FICC revenue (+14.9% yoy) formed 45.9% of our FY22 forecasts due to strong 1HFY22 volumes from both currencies (+6.8% yoy) and commodity derivatives (+17.5% yoy), along with higher T&C revenue from BidFX. We expect 2HFY22 revenue to grow further by 18-20% yoy, driven by the completion of the MaxxTrader acquisition and SGX’s OTC FX electronic communication network which went live in Nov 21. Total FX average daily volume (ADV) has increased 46% yoy to US$57b and management is optimistic that ADV may reach US$70-80b by end-2022.
• DCI: Reliable and stable. In line with expectations, revenue grew 3.4% yoy due to higher revenue contribution from Scientific Beta and an increase in data subscription
STOCK IMPACT
• Higher treasury income from interest rate hikes. With soaring inflation, the Fed is expected to raise interest rates by 3-4 times in 2022, with the first hike expected in Mar 22. As rates rise, we expect treasury income to follow suit and see a significant boost some time in 2HFY23, given that there is usually a 6-9 months lag.
EARNINGS REVISION/RISK
• Lower our FY22-24 earnings forecast by 6%, 4% and 0.3% respectively, due to lower treasury income forecasts than previously expected. We have also increased our FY22-24 China A50 assumptions to 96m (91m), 95m (86m) and 93m (77m) respectively as we become more upbeat on SGX’s leadership position for the China A50 index futures market.
VALUATION/RECOMMENDATION
• Maintain HOLD with a slightly lower target price of S$9.09 (S$9.74), pegging our PE multiple to 23.6x (23.8x) FY22F earnings, +1SD of SGX’s historical forward PE. Trading just below +1SD of its historical mean, we reckon that SGX is fully valued at current price levels and do not see major potential upside. We remain cautious that competition from HKEX and sliding SDAV would impact earnings. We think significant revenue from new initiatives such as SGX’s FX ETC network and SPACS would take time to gestate and major success from these initiatives could re-rate SGX to trade around to peers’ average (29.6x).
SHARE PRICE CATALYST
• Secondary listings of foreign listed entities, longer-than-expected period of trading volatility.