RHB Group Research analyst Shekhar Jaiswal has maintained his “neutral” call on Singapore Exchange (SGX), with a target price (TP) of $9.30.

In his report dated Jan 12, the analyst says that SGX securities daily average value (SDAV) and derivatives daily average volume (DDAV) are tracking his forecasts for 1HFY2023 ended December 2022. SGX is set to report its results for the period on Feb 9 before the market opens.

Citing declining margins, a fair valuation and an unexciting yield, Jaiswal estimates SGX’s ebitda margin will decline from 57.7% in FY2022 to 55.1% in FY2023 amid elevated operating cost pressures.

He believes the cash equity business will underperform amidst decelerating global growth. “So far, the operating data for SDAV and DDAV is tracking our estimates. If the trend continues, we expect to see downside risks to consensus earnings forecasts emerging,” he says.

SGX’s one-year forward P/E of 22x is in line with its historical average P/E, while its yield of 3.5% is below the STI’s forward yield of 4.8%. Jaiswal’s TP of $9.30 is based on a target P/E of 21x on 12 months’ forward earnings per share (EPS), and includes an environmental, social and governance (ESG) premium of 8% over its fair value of $8.60.

“FY2023 revenue is 5% below the Street’s, amidst lower SDAV assumption. While SDAV rose y-o-y in December 2022, the outlook for cash equities remains weak amidst an uncertain macroeconomic environment and low market valuations, which will delay new listings,” says the analyst.

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A pressured ebitda margin, a P/E that is level with the historical mean and a “lacklustre” dividend yield may hamper the stock’s re-rating, he adds.

SGX securities volume grew y-o-y in December but declined y-o-y for 1HFY2023 overall. While the STI was among the strongest stock market benchmarks in 2022, the index fell 1.2% in December.

Jaiswal notes that the total securities market turnover value was also “underwhelming” at $19.6 billion in December — unchanged on a y-o-y basis but down 28% m-o-m — while the SDAV stood at $940 million, 10% up y-o-y and down 24% m-o-m. For 2QFY2023, SDAV was flat y-o-y, while it was down 7% y-o-y in 1HFY2023.

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“The implied FY2023 SDAV, based on the first six months of data for FY2023, is 1.6% below our estimate. In December 2022, SGX saw the listing of LMS Compliance on its Catalist board,” says Jaiswal, adding that the group could continue to see weakness in its cash equities business and maintain his below-consensus estimates.

Meanwhile, the derivatives business across all asset classes continues to grow. In December 2022, the total derivatives traded volume was 19.9 million contracts, 3% up y-o-y and 16% down m-o-m, and DDAV amounted to 950,000, or a 13% y-o-y increase and a fall of 12% m-o-m.

DDAV for 2QFY2023 was up 21% y-o-y and for 1HFY2023 was up 12% y-o-y. The implied FY2023 DADV, based on the first six months of data for FY2023, is 1.4% below Jaiswal’s estimate.

“A continued rise in risk management activities drove derivatives volume growth in foreign exchange (FX) and commodities, as global markets responded to another round of rate hikes by major central banks and China’s surprise earlier-than-expected reopening,” he explains.

As at 11.31am, shares in SGX were trading 1 cent or 0.11% up at $9.10, with a dividend yield of 3.52%.

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