CGS-CIMB Research, DBS Group Research, PhillipCapital, and RHB Resesarch are upgrading their calls on the Singapore Exchange (SGX), following its record revenue posted for FY2020 and a dividend increase announced last week. 

See: SGX posts 16.6% increase in 4Q20 earnings of $121.1 mil; reports highest revenue since listing of $1.05 bil

Operating revenue for 4Q20 grew 12.2% y-o-y to $278.4 million. For FY20, the bourse registered 15.7% higher revenue y-o-y at $1.05 billion, the highest since its listing. SGX declared a dividend of 8 cents per share for 4Q2020, up from 7.5 cents the previous quarter, even amid a call from the Monetary Authority of Singapore (MAS) to moderate FY2020 dividends. 

See also: MAS calls on banks to cap dividends for FY20 to 60% of FY19

To CGS-CIMB analyst Ngoh Yi Sin, SGX beat consensus expectations by CGS-CIMB and Bloomberg in 4Q2020 ended June 30, reporting net profit of $121 million, up 16.6% y-o-y while down 11.9% q-o-q.

“We think the improving traction in SGX FTSE Taiwan Index Futures could mitigate the earnings gap left by its predecessor’s licence expiry in Feb 2021, which has been factored in our FY2021F EPS decline of 13.4%; this also accounts for marginally lower equity turnover even as we expect low interest rates and macro uncertainty to sustain capital markets’ activities and hedging demand,” says Ngoh.

Ngoh has tweaked earnings per share (EPS) forecasts for FY2021F down 0.2% and FY2022F up 3.8% on higher revenue and new expenses guidance. 

As such, CGS-CIMB is upgrading SGX to “add” with an increased target price of $9.00, up from $8.00.

To DBS Group Research analyst Lim Rui Wen, the surprise dividend increase will be underpinned by decent volumes in both equities and derivatives markets arising from the current market volatility.

SGX reported double digit growth in all business segments. FICC revenue – comprising both Fixed Income and Currencies and Commodities – Derivatives revenues – increased 23% y-o-y to $171.4 million and accounted for 16% of total revenue.

Equities revenue – comprising Equities – Cash as well as Equities – Derivatives revenues – rose 14% y-o-y to $759.7 million, accounting for 72% of total revenue, while Data, Connectivity and Indices revenue increased 19% y-o-y to S$121.6 million, accounting for 12% of total revenue. 

“SGX’s volume growth in derivatives in the last few years is testament to its execution capabilities,” says Lim. 

However, Hong Kong may pose a threat to SGX’s FTSE China A50 Index Futures, which accounts for approximately 40% of SGX’s total derivatives volume. “Beyond the immediate earnings impact, we believe SGX will face more competition from Hong Kong Exchange (HKEX) in the derivatives space following its new offerings with MSCI of up to 37 equity index futures contracts, announced on 27 May 2020.”

Lim upgrades SGX to “hold” from “fully valued”, with a target price of $8.40, up from $7.40. 

PhillipCapital analyst Tay Wee Kuang points to SGX’s acquisition of index firm Scientific Beta in 3Q2020 and the full acquisition of FX trading platform BidFX at the end of June as it expands its footprint into the FX OTC market. 

Tay upgrades SGX to “buy” with an increased target price of $9.45, up from $9.28.

“Both acquisitions will complement SGX’s current business by expanding its suite of products and presents cross-selling opportunities for the company. Scientific Beta has contributed a meaningfully to SGX’s DCI business (S$14.4mn) in FY20 on half a year’s revenue. It will grant SGX capabilities to launch novel products from smart beta investing to ESG investing that caters to the demands of market participants,” says Tay.

RHB analyst Leng Seng Choon is maintaining “buy” on SGX with a target price of $9.20, adding that there may be possible downside risk from the pandemic, though limited. 

“Given SGX’s 8% YTD share price decline, its valuation is attractive. SGX remains in a net cash position – with a monopoly over the trading of Singapore-listed equities – and the downside is deemed limited,” says Leng.

“If the Covid-19 pandemic is prolonged, trading volumes could experience a gradual decline from current high levels.”

Meanwhile, OCBC Investment Research analysts are recommending "hold" on SGX, with a fair value of $8.30. OCBC warns of "weaker than expected trading volumes and activities", driven by lowered risk appetite, while also noting regional competition pressures and products, fee pressure and risk of market share loss. 

As at 11.50am, shares in SGX are trading at 3 cents higher, or 3.7% up, at $8.47.