SGX Earnings: Outsize Exposure to Derivatives Provides Resilient Growth

We maintain our SGD 13 fair value estimate for wide-moat Singapore Exchange S68 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.

In our view, the exchange’s result demonstrates the attractiveness of its outsize derivatives exposure, which is key to our thesis for the company. Similar to other exchanges, revenue from cash equity trading and clearing was pressured during the year, at a 16% decline, as rising interest rates and macro uncertainty weighed on stock prices and trading volumes. The Straits Times Index, a market barometer for Singapore consisting of the top 30 largest listed businesses, was mostly flat in the year. Similarly, IPOs, long a mainstay of peer exchanges but an area of weakness for SGX, were lackluster across the world and were down more than half for the exchange.

These declines were offset by strong derivatives trading as market participants sought to hedge positions and get exposure to volatility. SGX’s equity derivatives business, which includes some of the most liquid and widely traded equity derivatives for regional markets, including China and India, increased revenue 17% for the year and surpassed cash equity revenue. Revenue from currency and commodity derivatives, inherently volatile, jumped 37%. In a world where news of bank failures in the United States alternated with a struggling property market in China, we like SGX’s outsize exposure to volatility through its derivatives businesses, accounting for 58% of revenue and well protected by network effects.