Despite robust contributions from forex and commodities derivatives, UOB Kay Hian (UOBKH) Research thinks there are no near-term catalysts for the Singapore Exchange (SGX) to justify a higher valuation.
This comes after the local bourse reported its October trading statistics on Nov 14.
“Higher treasury income from interest rate hikes is expected to start from 2HFY2023, which we reckon has already been priced in. With a moderate yield of about 3%, we still like SGX for its resilient business model that benefits from the global economic uncertainty, but recommend waiting for better entry points,” writes UOBKH analyst Llelleythan Tan.
In a Nov 17 note, Tan maintained his “hold” call on SGX with an unchanged target price of $10.04, which represents a 10.5% upside against a traded price of $9.08.
Securities turnover value softened in October, notes Tan. “In line with expectations, Securities Daily Average Value (SDAV) dropped slightly (-0.3% y-o-y, -1.5% m-o-m), supported by an increase in market turnover value for structured warrants and daily leverage certificates (+71% m-o-m).”
Assuming flat growth from these two securities, SDAV would have fallen 2.4% y-o-y. Barring any unforeseen spike in trading volatility, Tan expects SDAV to continue its downtrend.
SGX’s record-high derivatives volume are in line, he adds. “Derivatives Daily Average Volume (DDAV) surged (+23.0% y-o-y, +16.8% m-o-m) to a record high since Mar 20, driven by higher total volumes across equity, forex and commodities derivatives.”
According to SGX, concerns over China’s economic outlook, along with optimism over a slowdown in interest-rate hikes led to increased trading activity. Total equity index futures volumes grew 14.7% y-o-y, contributed by increased FTSE China A50 index futures volumes (+15.2% y-o-y, +8.3% m-o-m) and China H50 index futures volumes (+78.0% y-o-y, +40.0% m-o-m).
Other major equity indexes, such as the FTSE Taiwan index futures (+16.8% y-o-y, +11.8% m-o-m) and MSCI Singapore index futures (+33.5% y-o-y, +9.8% m-o-m) also grew, with the latter at an all-time high.
In particular, forex and commodities outperformed in October. Above expectations, total forex futures volumes surged (+48.8% y-o-y, -4.8% m-o-m) as SGX’s three major forex contracts outperformed.
Average daily volume (ADV) of USD/CNH futures, KRW/USD futures and INR/USD futures climbed from elevated institutional hedging demand, in response to heightened inflation expectations and sustained US dollar strength.
Keeping up with forex futures, commodity derivatives volumes also increased 52.6% y-o-y as iron ore futures climbed on the back of increased hedging demand, while dairy futures surged from increasing adoption.
FICC becoming major revenue contributor
Earmarked as SGX’s future revenue growth driver, revenue from the fixed income, currencies and commodities (FICC) segment has been growing at a robust CAGR of 22.1% since FY2019, notes Tan.
Revenue from the FICC segment formed around 23% of SGX’s total FY2022 revenue, from 15% in FY2019, catching up to the equity derivatives (28% of FY2022) and cash equities segments (35% of FY2022).
“Based on our estimates, we expect FICC’s segmental revenue to continue its upward m-o-mentum as revenue for both its commodities and forex derivatives grow,” writes Tan.
Commodities will become as vital as forex for future sustained growth, says Tan. Total volumes for both the sub-segments have been growing steadily, backed by increasing adoption and demand for risk management, he adds.
“Historically, the volume mix has been largely similar between the two sub-segments since pre-Covid-19, and commodities/forex derivatives formed 46.8%/53.2% of total volumes respectively in October, implying roughly equal contributions for FICC’s robust growth,” writes Tan.
For the FICC segment to continue and maintain its strong revenue growth momentum moving forward, growth from the higher-yielding commodities derivatives volumes has to match with the record-high volumes the forex futures have been achieving, says Tan.
In response to supercharged growth in electric vehicles and decarbonisation, SGX launched a suite of energy metal derivatives in September, providing market participants with price discovery of battery raw materials such as cobalt and lithium.
SGX also launched Shanghai rebar futures in October, providing market participants with capital-efficient access to China, the world’s largest producer and consumer of steel, notes Tan.
“Although it is still early days, we opine that these new derivatives have the potential to grow similarly to the recently launched dairy derivatives. Since its inception, SGX has seen robust growth of 31x from November 2021 to October, with 1QFY2023 dairy derivatives volumes increasing by 36.9% y-o-y and 13.7% q-o-q.”
Meanwhile, RHB Group Research analyst Shekher Jaiswal stayed "neutral" on SGX with a target price of $9, which includes an ESG premium of 8% over its fair value of $8.30.
"After the recent rebound in Singapore Exchange’s share price, the stock looks fairly priced, amidst a muted earnings outlook," writes Jaiswal in a Nov 23 note.
"SGX’s share price has increased 11% in the last one month and has outperformed the Straits Times Index (STI) by 2%. This has brought its forward P/E to 22.2x, which is in line with its historical 1-year forward P/E of 22.1x," he adds.
Going forward, the expectation of a muted SDAV outlook could pose a downside risk to analyst estimates, says Jaiswal. "This could keep investors at bay for now. Moreover, the stock offers a below-market dividend yield of 3.5%."
As at 9.16am, shares in SGX are trading 6 cents lower, or 0.64% down, at $9.33.