Company Reports

We maintain our SGD 12.40 fair value estimate for wide-moat Singapore Exchange, or SGX, following first-half financial results. At current prices, SGX shares screen as materially undervalued.

We expect Singapore Exchange’s strategy for the foreseeable future to focus on maintaining or reclaiming its status as a regional financial hub in a deglobalizing world. Singapore is a small city-state, which by itself would arguably be too small to run a profitable exchange business. Singapore and SGX have therefore had to focus outward, in order to broaden their catchment zone for business. Thereto, Singapore offers foreign companies a strong legal system, business-friendly climate, mature financial ecosystem with sector expertise in REITs, and an outsize pool of domestic capital that needs to be deployed. As a result, the number of foreign companies listed on SGX make up around 40% of total listings, which is multiples higher than peer exchanges. It has become the dominant venue for some of the most liquid and widely traded equity derivatives products for various regional markets, including the FTSE China A50 Index Futures and the Indian Nifty 50 Index Futures. However, over the past decade, SGX has faced increasing competition from Hong Kong Exchanges and Clearing, or HKEx, and the development of a native financial ecosystem in China, through the Shanghai Stock Exchange and the Shenzhen Stock Exchange. As a result, there has been a dearth of new listings on SGX, which ultimately effects a long tail of trading and clearing business. Additionally, HKEx has launched competing derivatives products to SGX’s FTSE China A50 Index Futures, and the Indian government has sought to transfer the Nifty 50 Index Futures market to Indian exchanges. Our outlook is for no improvement to SGX’s listings business, but for SGX’s derivatives business to maintain its regional status.

We adjusted the fair value estimate for wide-moat Singapore Exchange down by 5% to SGD 12.40 to account for smaller trading volumes in the equity division fiscal year to date and the possibility that China’s economic woes will persist for longer than previously forecast. The exchange’s shares continue to trade at a material discount to our fair value estimate.

We expect Singapore Exchange’s strategy for the foreseeable future to focus on maintaining or reclaiming its status as a regional financial hub in a deglobalizing world. Singapore is a small city-state, which by itself would arguably be too small to run a profitable exchange business. Singapore and SGX have therefore had to focus outward, in order to broaden their catchment zone for business. Thereto, Singapore offers foreign companies a strong legal system, business-friendly climate, mature financial ecosystem with sector expertise in REITs, and an outsize pool of domestic capital that needs to be deployed. As a result, the number of foreign companies listed on SGX make up around 40% of total listings, which is multiples higher than peer exchanges. It has become the dominant venue for some of the most liquid and widely traded equity derivatives products for various regional markets, including the FTSE China A50 Index Futures and the Indian Nifty 50 Index Futures. However, over the past decade, SGX has faced increasing competition from Hong Kong Exchanges and Clearing, or HKEx, and the development of a native financial ecosystem in China, through the Shanghai Stock Exchange and the Shenzhen Stock Exchange. As a result, there has been a dearth of new listings on SGX, which ultimately effects a long tail of trading and clearing business. Additionally, HKEx has launched competing derivatives products to SGX’s FTSE China A50 Index Futures, and the Indian government has sought to transfer the Nifty 50 Index Futures market to Indian exchanges. Our outlook is for no improvement to SGX’s listings business, but for SGX’s derivatives business to maintain its regional status.

We expect Singapore Exchange’s strategy for the foreseeable future to focus on maintaining or reclaiming its status as a regional financial hub in a deglobalising world. Singapore is a small city-state, which by itself would arguably be too small to run a profitable exchange business. Singapore and SGX have therefore had to focus outward, in order to broaden their catchment zone for business. Thereto, Singapore offers foreign companies a strong legal system, business-friendly climate, mature financial ecosystem with sector expertise in REITs, and an outsize pool of domestic capital that needs to be deployed. As a result, the number of foreign companies listed on SGX make up around 40% of total listings, which is multiples higher than peer exchanges. It has become the dominant venue for some of the most liquid and widely traded equity derivatives products for various regional markets, including the FTSE China A50 Index Futures and the Indian Nifty 50 Index Futures. However, over the past decade, SGX has faced increasing competition from Hong Kong Exchanges and Clearing, or HKEx, and the development of a native financial ecosystem in China, through the Shanghai Stock Exchange and the Shenzhen Stock Exchange. As a result, there has been a dearth of new listings on SGX, which ultimately effects a long tail of trading and clearing business. Additionally, HKEx has launched competing derivatives products to SGX’s FTSE China A50 Index Futures, and the Indian government has sought to transfer the Nifty 50 Index Futures market to Indian exchanges. Our outlook is for no improvement to SGX’s listings business, but for SGX’s derivatives business to maintain its regional status.

We maintain our SGD 13 fair value estimate for wide-moat Singapore Exchange following full-year results. Adjusted net profit after taxes of SGD 503 million for fiscal 2023 is in line with our SGD 506 million forecast. The exchange intends an SGD 8.5 cent final quarter dividend per share subject to approval at the annual general meeting in October. This would add up to SGD 32.5 cents for the year. At current prices, shares in SGX screen as materially undervalued.

We expect Singapore Exchange’s strategy for the foreseeable future to focus on maintaining or reclaiming its status as a regional financial hub in a deglobalising world. Singapore is a small city-state, which by itself would arguably be too small to run a profitable exchange business. Singapore and SGX have therefore had to focus outward, in order to broaden their catchment zone for business. Thereto, Singapore offers foreign companies a strong legal system, business-friendly climate, mature financial ecosystem with sector expertise in REITs, and an outsize pool of domestic capital that needs to be deployed. As a result, the number of foreign companies listed on SGX make up around 40% of total listings, which is multiples higher than peer exchanges. It has become the dominant venue for some of the most liquid and widely traded equity derivatives products for various regional markets, including the FTSE China A50 Index Futures and the Indian Nifty 50 Index Futures. However, over the past decade, SGX has faced increasing competition from Hong Kong Exchanges and Clearing, or HKEx, and the development of a native financial ecosystem in China, through the Shanghai Stock Exchange and the Shenzhen Stock Exchange. As a result, there has been a dearth of new listings on SGX, which ultimately effects a long tail of trading and clearing business. Additionally, HKEx has launched competing derivatives products to SGX’s FTSE China A50 Index Futures, and the Indian government has sought to transfer the Nifty 50 Index Futures market to Indian exchanges. Our outlook is for no improvement to SGX’s listings business, but for SGX’s derivatives business to maintain its regional status.

We are placing Singapore Exchange under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. The number of foreign companies make up close to 40% of total market capitalization of all equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings driver going forward, and is expected to preserve the exchange's competitive advantages. We believe Singapore Exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in the city-state.

Narrow-moat Singapore Exchange’s fiscal full-year result was within our expectation. Excluding Treasury income, full-year revenue was up 7% to SGD 1.05 billion. Higher expense from recent acquisitions continues to flow through, with overall net profit up 1% year on year. Fourth-quarter dividend of SGD 0.08 per share is in line with previous quarters, taking full-year dividend to SGD 0.32 per share. We reaffirm our SGD 11.20 fair value estimate and our view of the exchange is unchanged. We continue to see the exchange’s expansion in its product portfolio as underpinning growth in the medium term. As such, our revenue forecasts are in line with the exchange’s medium-term guidance of high-single-digit growth. Capital expenditure guidance of SGD 70 million to SGD 75 million in 2023 was slightly above our forecast of SGD 62.5 million, and we lift our long-term assumption to SGD 60 million, from SGD 55 million.

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. The number of foreign companies make up close to 40% of total market capitalization of all equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings driver going forward, and is expected to preserve the exchange's competitive advantages. We believe Singapore Exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in the city-state.

Our forecasts for Singapore Exchange, or SGX, are adjusted slightly after the publication of its May monthly data. With 11 months of fiscal 2022 in the bag, we expect average turnover for the cash market to be lower by 5% for the full year, compared with last year; while anticipating higher volume for currencies and commodities derivatives to offset flat trading volume for equity related derivatives. New bond listings were also stronger in fiscal 2022. We assume revenue growth of 6% for fiscal 2022 and expect operating expense to be in line with earlier guidance of SGD 565 million to SGD 575 million. As noted at the first-half result, the absolute operating guidance was left unchanged even if the integration costs for MaxxTrader were added. This implies the underlying operating expense declined and we attribute this to management’s execution, and the scalability of the exchange business. Our fair value estimate of SGD 11.20 per share is reaffirmed and the exchange remains undervalued, in our view.

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. The number of foreign companies make up close to 40% of total market capitalization of all equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings driver going forward, and is expected to preserve the exchange's competitive advantages. We believe Singapore Exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in the city-state.

While Singapore Exchange’s first-half net profit decline of 3% year on year may look disappointing, this reflects market conditions and we believe second-half operating margin should improve. Revenue trends were in line with our expectation with higher commodities and currency turnover, offset by a weaker equity market. The latter also resulted in lower volume for equity related derivatives contracts. Our fair value estimate of SGD 11.20 is unchanged, along with our revenue assumption, which already assumes weaker capital market conditions. We continue to expect the exchange to increase revenue at CAGR of 9% over the next five years, supported by increasing turnover for the derivatives portfolio, including equity related, commodities and foreign exchange products. We continue to believe SGX is undervalued, with the higher growth from a broadening product portfolio not factored into SGX’s 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.

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. The number of foreign companies make up close to 50% of total market capitalization of all equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings driver going forward, and is expected to preserve the exchange's competitive advantages. We believe Singapore Exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in the city-state.

Hong Kong Exchanges and Clearing, or HKEx, has finally received regulatory approval in launching the MSCI China A50 contract. A new licensing agreement on the contract was reached with MSCI, building on a suite of MSCI derivatives products, launched in mid-2020. The MSCI China A50 index comprises the 50 largest companies listed on the Shanghai and Shenzhen exchanges, providing a representation of the overall Chinese economy. In our view, the new product is in line with the exchange’s overall strategy in broadening its asset classes and developing new financial products. The contract itself was long expected to be launched and was previously held up by regulators.

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. The number of foreign companies make up close to 50% of total market capitalization of all equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings drivers going forward, as will the preservation of its competitive advantages. We believe the exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in the city-state.

Singapore Exchange’s fiscal 2021 result does not change our long-term view on the narrow-moat-rated exchange. Our thesis has been that the derivatives business will be the key earnings driver for the group. In our view, an expansion in their currency business from the acquisition of BidFX and MaxxTrader takes this one step further, providing an added growth prospect and broader diversification to its earnings. Our forecasts are adjusted for the higher operating expense and capital expenditure. We leave our fair value estimate unchanged at SGD 11.20 per share and the stock is fairly valued, after a decline in its share price post the result.

Singapore Exchange, or SGX, continues to bolster its foreign exchange product offering by acquiring MaxxTrader for USD 125 million. An additional performance based earnout of up to USD 35 million is available if targets are achieved post acquisition. The deal represents 8.3 times 2020 revenue and is expected to be earnings per share accretive in year 1. Management noted compound annual revenue growth of close to 15% for MaxxTrader, which is above overall revenue growth for the exchange, but its operating margin is lower. Further cost guidance is expected to be provided at the June year-end fiscal 2020 result. We retain our existing forecasts and fair value estimate of SGD 11.20 per share, as the acquisition is less than 2% of the exchange’s market capitalization. Our thesis on the exchange is unchanged as we remain positive on its strategy in broadening its financial products.