SINGAPORE (Apr 7): Even as markets continue to struggle with the economic impact of Covid-19, the resulting market volatility spells good news for Singapore Exchange (SGX), says RHB Group Research.

SGX is expected to announce its results for 3QFY2020 ended March on April 24. But Bloomberg data already points to a robust 59% y-o-y increase in securities average daily volume (SADV) to $1.55 billion in 3QFY2020. This also marks a 51% q-o-q jump from 2QFY2020. 

“The sharp spike was due to significantly higher trading volumes, as investors repositioned their portfolios following the disruptions from the Covid-19 pandemic,” says analyst Leng Seng Choon in a April 6 report.

He notes that derivatives average daily contracts traded stood at 1.16 million for Jan-Feb 2020, some 38% higher than in the preceding quarter.

“We believe market volatility will keep derivatives volumes firm,” Leng says. “The equity market indices also showed extreme volatility during this period.”

On the back of higher expected contributions from both derivatives and equities, Leng is raising his FY2020 earnings forecast by 11%.

The brokerage is raising  its target price on SGX from $8.80 to $9.10. However, it is maintaining its “neutral” recommendation for the stock.

“Given the counter’s 8% share price rise over the past six months, we believe the positives – particularly for equities trading volume surges – are largely priced in,” Leng explains.

In particular, Leng likes SGX for its resilient fundamentals, which make it an attractive defensive play amid this time of economic uncertainty. 

With a monopoly over the trading of Singapore-listed equities, the company has maintained a strong balance sheet and a net cash position – putting it in good stead to  withstand external shocks arising from Covid-19. 

SGX will also draw long-term investors due to its respectable dividend yield. It declared a dividend of 30 cents per share (82% payout ratio) in FY2019 and is expected to offer 35 cents per share (85% payout ratio) in FY2020 –  translating to a dividend yield of 3.8%. 

These optimistic forecasts, however, are subject to global uncertainty over the Covid-19 situation in the short- to medium-term as well as uncertain global economic fluctuations and geopolitical developments in the medium- to long-term. 

How long the pandemic lasts could also have a bearing on SGX’s earnings. 

“If the Covid-19 pandemic is prolonged, trading volumes could experience a gradual decline from current high levels,” Leng warns. “If Covid-19 is resolved soon, we could see another round of short-term trading volume surges.”

As at 2.23pm, shares in SGX are trading 25 cents higher, or up 2.7%, at $9.58.