Singapore Exchange Turnover Mixed in the First Half, Downside Priced Into Current Share Price

Ahead of Singapore Exchange, or SGX’s, first-half fiscal 2022 result, our forecast for the narrow moat rated exchange is adjusted lower to factor in weaker-than-expected cash market and derivatives turnover up to December 2021. First fiscal half cash market turnover is 8% lower than the same period last year while derivatives volume is 0.5% lower than the same period last year. The latter is attributable to weaker turnover for equity related contracts, offset by better-than-expected commodities, energy and foreign exchange related contracts. While equity related contracts were weaker, the positive from the data was continued increase in the FTSE China A50 contract. This was a key concern for the market as the wide moat rated Hong Kong Exchanges and Clearing, or HKEx, launched a similar MSCI China A50 contract, and the market feared a migration of turnover from SGX to HKEx. Our view that the launch of the MSCI China A50 contract on HKEx may attract a new market participants, rather than a direct substitution effect, is unchanged. We continue to believe SGX’s now more broadened portfolio will maintain market participants and turnover on its exchange. A broad product portfolio also benefits SGX by providing a more diversified income, as reflected by the stronger turnover for commodities, energy and foreign exchange related contracts. The net impact on our forecast change is a 6% decline in our fiscal 2022 revenue forecast but our forecasts thereafter are largely unchanged. Our fair value estimate of SGD 11.20 is unchanged as the lower earnings are offset by the time value of money. We continue to see SGX as undervalued and market concern on its derivatives portfolio factored into the current share price. The key focus for the result is the integration of the earlier announced acquisition of MaxxTrader, though this may be early as the transaction closed at the end of December 2021.