1HFY24 Results Preview: FICC Segment To Become Largest Revenue Contributor
We expect SGX to report higher 1HFY24 revenue (+12% yoy) and adjusted PATMI (+12% yoy), driven by the FICC segment and higher treasury income. Both the cash equities and equity derivatives segments are poised to underperform as 1HFY24 total securities traded value and volumes fell respectively. The FICC segment is set to post record-high revenue driven by robust volumes. With a lack of near-term catalysts, we maintain HOLD and a lower target price of S$10.42 (S$10.46 previously).
WHAT’S NEW
• Singapore Exchange (SGX) is set to release its 1HFY24 results on 1 Feb 24, before the market opens. We list some factors below that would impact its upcoming results.
• Weak securities turnover. For 1HFY24, total securities turnover value fell by 11.9% yoy, slightly below our expectation. The larger-than-expected yoy drop was largely due to elevated interest rates suppressing trading velocity, coupled with ongoing global geopolitical tensions dampening investor sentiment. Also, with SGX’s average clearing fee expected to be lower yoy, we reckon that this would lead to a 16% yoy fall in 1HFY24 cash equities trading and clearing (T&C) revenue to around S$75m.
• Stable derivatives volume. In line with our expectation, 1HFY24 total derivatives traded volumes were slightly higher at 0.8% yoy, backed by record-high volumes from both commodities (+48.3% yoy) and foreign exchange (+23.8% yoy) derivatives but offset by lower equity derivatives volumes (-13.6% yoy). Total equity derivatives volume was largely dragged by SGX’s FTSE China A50 Index Futures whereby 1HFY24 traded volumes fell by 9.3% yoy. With average clearing fee expected to stay stable yoy, we reckon that stronger 1HFY24 T&C revenue from the fixed income, currencies and commodities (FICC) segment (+28.8% yoy, +S$31m) would offset the fall in 1HFY24 T&C revenue from equity derivatives (-14.0% yoy, -S$20m).
• Ramp-up in treasury income. We expect 1HFY24 treasury income to surge past preCOVID-19 (FY19-20) levels of S$140m, given that the current Fed funds rate of 5.25- 5.50% is double that of FY19-20’s. As a recap, overall treasury income doubled in 2HFY23 to S$92m and we expect 1HFY24 treasury income to surge to around S$130m for 1HFY24, representing roughly 10% of our FY24 overall revenue estimates.
• Higher yoy dividend. As a recap, SGX declared an interim dividend of 16 S cents for 1HFY23 and a final dividend of 16.5 S cents for 2HFY23 respectively, implying a total FY23 dividend of 32.5 S cents and dividend payout ratio (adjusted earnings) of 69%. The group had also guided for a mid-single-digit % growth in total dividends per share moving forward into FY24. Thus, we expect 1HFY24 dividend payout ratio to be around 70% at 17 S cents/share, similar to 1HFY23’s 72%. We also expect FY24 total dividends per share to be at 35 S cents/share, implying a 7% yoy increase in total dividends per share.
STOCK IMPACT
• 1HFY24: Boost from treasury income and FICC. Similar to 2HFY23, we expect higher yoy 1HFY24 overall revenue and adjusted PATMI (excluding S$47.8m one-off in 1HFY23) of around S$640m (+11% yoy) and S$265m (+12% yoy) respectively, driven by higher treasury income and strong contributions from the FICC segment. For FY24, we expect overall revenue (+10% yoy) and adjusted PATMI (+8% yoy) to grow.
• Cash equities: Bottoming out. As 1HFY24 total securities traded value fell by 11.9% yoy, we expect 1HFY24 cash equities’ overall segmental revenue to also drop by 7% yoy to around S$160m, dragged by lower T&C revenue and average clearing fees as mentioned earlier. Moving forward, we are still of the view that securities daily average value (SDAV) and cash equities revenue are likely to bottom out in 1HFY24 before returning to growth in 2HFY24, in line with expected interest rate cuts which would likely
improve trading velocity.
• Equity derivatives: Soft underlying performance. Despite a 13.6% yoy decline in total equity volumes in FY23, we expect 1HFY24 overall segmental revenue to increase by 6% yoy to S$185m. This is largely due to higher treasury income, offset by lower T&C revenue (-14% yoy). Moving forward, we opine that total traded volumes growth may stay muted due to an increasingly uncertain macro-economic outlook that is dampening investor risk-on sentiment for equities.
• FICC: Record-high volumes to drive outperformance. Driven by record-high volumes for both commodities and foreign exchange, we expect 1HFY24 FICC overall segmental revenue to surge by 36% yoy to S$210m from higher T&C revenue (+29% yoy) and treasury income, becoming SGX’s largest revenue contributor. Moving forward, we reckon that revenue from the FICC segment will continue its upward momentum, driven by China’s reopening and an increasingly uncertain macro-economic outlook.
• Data, connectivity and indices: Stable contributor. We expect 1HFY24 revenue from this segment to stay relatively stable, growing around 3% yoy.
EARNINGS REVISION/RISK
• We make slight downward adjustments to our FY24-26 adjusted PATMI forecasts, on the back of lower cash equity value and equity derivative volume assumptions. For FY24- 26, we have adjusted our adjusted PATMI estimates to S$543.4m (S$545.0m previously) and S$555.8m (S$568.4m previously) and S$560.6m (S$581.9m previously) respectively.
VALUATION/RECOMMENDATION
• Maintain HOLD with a slightly lower PE-based target price of S$10.42 (S$10.46 previously), pegged to the same 21x PE multiple, -0.5SD to SGX’s historical forward mean, to FY24 earnings.
• Despite robust growth from the FICC segment, we reckon that there are no near-term catalysts to justify a higher valuation. Higher treasury income from interest rate hikes has already started coming through, which we reckon has already been priced in. Despite a moderate yield of about 3.6%, we like still SGX for its resilient business model that benefits from the global economic uncertainty but recommend waiting for better entry
points.