Riding the volatility wave
Derivatives supportive. ESG disclosures can improve
SGX’s derivatives platform continues to see support as investors look to mitigate and hedge risks in the current global environment. Its multi-asset strategy is a strong competitive advantage. This should continue to improve regional relevance. The Group’s sustainability disclosures are good based on MIBG’s ESG2.0 scoring. However, there is significant headroom for improvement. Increased transparency could drive larger ESG weightings for SGX going forward, in our view. Adjustments to market run rates and peer valuations sees us lowering TP to SGD10.65. Maintain BUY.
Aug 22 market statistics show futures volumes up +4% YoY and options +19%. SGX’s liquid contracts in FX, commodities and indices continue to provide a competitive moat in current market volatility. This is important, as derivatives-led, non-cash equities segment is set to deliver 58% of revenues in FY23 (c. 51% FY22). Singapore’s defensive equity market has held up better than global peers. Our derived market velocity for FY23YTD at 29% – while lower than FY22 (36%) – is similar to pre-Covid FY17-19 levels. This should give some downside protection to the equities segment revenues going forward, in our view.
Good ESG disclosures. Headroom for improvement
Under our enhanced ESG2.0 scoring, SGX receives a 56. This is above average, and the Group’s efforts in improving sustainability reporting & action in the financial sector (ESG disclosure portal, CIX carbon exchange etc.) are strong positives. However, improvements to quantitative disclosures in areas such as waste management and diversity (female workforce at 45% vs. 49% in FY20) could drive a higher score, in our view. Particular areas of note is in Board independence and female representation, where the Group’s proportions are significantly lower than HKEX (388 HK, HKD284.80, NR).
Lower TP to SGD10.65. Maintain BUY
A stronger derivative outlook sees us raising FY23E EPS by 3%, but listings uncertainty and new business integration expenses lowers FY24E by 3%. Our blended multi-stage DCF (WACC 7.2%, 1% terminal growth) and peer PE (22x target – reduced from 26x) TP is lowered to SGD10.65. We believe SGX’s multi-asset approach gives it a strong advantage during market uncertainty, while also increasing regional relevance. Improving sustainability disclosures should also drive bigger ESG weightings. BUY.