Singapore Exchange (SGX SP): Navigating Market Volatility and Sustaining Growth

Singapore Exchange (SGX SP): Navigating Market Volatility and Sustaining Growth

Overview:

Singapore Exchange (SGX) is a leading multi-asset exchange, providing listing, trading, clearing, settlement, depository, and data services across equity, fixed income, and derivatives markets. With its extensive global footprint, SGX offers a wide range of products catering to institutional and retail clients. SGX continues to maintain a strong position in global markets despite ongoing global economic uncertainties, rising interest rates, and fluctuating market conditions.

In the latest updates, SGX has seen robust performance in securities trading and derivatives despite market volatility. Its strategic initiatives in expanding its product offerings and enhancing sustainability efforts have positioned SGX for continued growth.

Recommendation and Target Price:

• Recommendation: NEUTRAL (Maintained)
• Target Price: SGD 11.70 (+8% Upside)
• Current Price: SGD 11.00
• Market Cap: USD 9,049 million
• Broker: RHB
• Date of Recommendation: September 10, 2024

Key Investment Highlights:

1. Strong Securities Trading Volumes

SGX’s Securities Daily Average Value (SDAV) showed impressive growth, recording a 28% year-on-year (YoY) and 19% month-on-month (MoM) increase in August 2024, reaching SGD 1,370 million—the highest level since May 2022. The surge in trading volumes reflects heightened market activity and volatility, driven by investor uncertainty surrounding the interest rate outlook and the US election outcomes.

• Retail Investor Activity: SGX saw notable engagement from retail investors, with SGD 685 million in net securities purchases in August, the highest in 10 months.
• Straits Times Index (STI) Performance: The STI has returned 6.7% year-to-date (YTD), despite a marginal 0.4% decline in August to 3,442.93 points.

2. Resilient Derivatives Business

SGX’s derivatives business remains a core revenue driver, supported by robust volumes across asset classes, particularly in FX and commodity derivatives. In August 2024, total derivatives trading volume grew 4% YoY to 24.6 million contracts, with Derivatives Daily Average Volume (DDAV) up 9% YoY and 15% MoM.

• Nikkei 225 and GIFT Nifty Futures: Both saw increased trading volumes, with rising interest from international participants.
• Commodity Derivatives: Notably, SGX’s energy derivatives segment saw strong growth, benefiting from increased market volatility.
• Interest Rate Futures: The introduction of the Tokyo Overnight Average Rate (TONA) futures has driven increased interest rate derivatives trading, positioning SGX as a key player in Asian interest rate futures.

3. Growth Prospects in Listings and Derivatives

Looking forward to FY25 and beyond, SGX is expected to benefit from an increase in equity listings, driven by global firms seeking access to Asian capital markets. However, the elevated SDAV seen in 1H FY25 is expected to moderate in the second half of FY25 as investors gain more clarity on interest rates and global economic growth.

The derivatives business is expected to continue its trajectory of outpacing the growth of securities business revenue, particularly with increasing demand for risk management products amidst market volatility.

4. ESG Leadership and Commitment

SGX continues to demonstrate leadership in Environmental, Social, and Governance (ESG) practices. As the first Asian exchange to commit to 1.5°C-aligned science-based emission reduction targets across Scope 1-3 emissions, SGX is making significant strides toward sustainability.

• Scope 1 and 2 Emissions Reduction: SGX achieved a 42% reduction target in Scope 2 emissions by FY2031, with a base year of FY2021.
• Scope 3 Emissions: SGX has an ongoing engagement plan with its co-location data center supplier to set science-based targets for Scope 3 emissions within the next five years.

The exchange’s ESG initiatives are well-aligned with growing demand for climate and sustainability-related products. SGX continues to expand its suite of ESG-related offerings, including MSCI Climate Action Indexes, which are designed to support institutional investors in driving emissions reductions in the real economy.

5. Financial Highlights and Growth Projections

SGX has delivered resilient financial performance, driven by growth in its core segments and prudent cost management.

• FY25-FY27 Financial Projections: SGX’s revenue is expected to grow steadily from SGD 1,318 million in FY25F to SGD 1,457 million in FY27F, driven by higher securities trading volumes, derivatives growth, and increasing listings.
• Recurring Net Profit: SGX is forecast to deliver SGD 584 million in recurring net profit for FY25F, a 9.7% increase YoY.
• Dividend Yield: SGX’s dividend yield is expected to remain stable, with a forecast increase from 3.2% in FY25F to 3.6% in FY27F, supported by management’s guidance to maintain strong shareholder returns.

Valuation Metrics (FY25-FY27):

• Recurring Price-to-Earnings (P/E): 20.12x in FY25F, declining to 17.78x in FY27F.
• Price-to-Book (P/B): 5.4x in FY25F, improving to 4.5x in FY27F.
• Return on Equity (ROE): 28.3% in FY25F, with a gradual decline to 26.4% in FY27F.
• EV/EBITDA: Expected to improve from 13.57x in FY25F to 11.72x in FY27F, highlighting the operational efficiency of SGX’s business model.

Risks to Consider:

• Market Volatility: Given SGX’s reliance on trading volumes, prolonged periods of market calm or reduced volatility could result in lower SDAV and DDAV, affecting both securities and derivatives revenue.
• Interest Rate Sensitivity: SGX’s treasury income is subject to interest rate fluctuations. A faster-than-expected decline in interest rates could reduce treasury income, impacting overall profitability.
• Competitive Pressure: SGX faces competition from other global exchanges, particularly in derivatives trading, which could impact market share and growth potential.

Conclusion:

Singapore Exchange remains a robust and resilient player in the financial services sector, benefiting from its diversified revenue streams across securities and derivatives. The exchange is well-positioned to capitalize on market volatility, ongoing demand for risk management products, and its leadership in ESG practices. While near-term uncertainties may moderate growth, SGX’s long-term outlook remains positive, with a potential upside of 8% to the target price of SGD 11.70.

For investors seeking a stable, income-generating stock with exposure to Asia’s dynamic financial markets, SGX presents a solid investment opportunity, supported by consistent dividend yields and a diversified growth strategy.

Thank you