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SGX 'leaning on' FX, commodities as equities business stays 'unexciting': analysts

Jovi Ho
Jovi Ho • 5 min read
SGX 'leaning on' FX, commodities as equities business stays 'unexciting': analysts
SGX reported adjusted net profit of $251.4 million, 6.2% higher y-o-y, for 1HFY2024. Photo: Albert Chua/The Edge Singapore
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Even after the Singapore Exchange S68 -

’s (SGX Group) recent results for its 1HFY2024 ended December, RHB Bank Singapore analyst Shekhar Jaiswal still thinks the bourse operator’s equities business is “unexciting”.

That said, Jaiswal thinks the outlook could get slightly better for SGX, with securities daily average traded value (SDAV) and cash equities revenue improving amid a brighter economic growth outlook and some clarity on moderating interest rates, which should spur interest in S-REITs.

In a Feb 6 note, Jaiswal stays “neutral” on SGX with an unchanged target price of $9.60, which represents a 2% upside against its Feb 5 closing price of $9.43.

On Feb 1, SGX reported adjusted net profit of $251.4 million, 6.2% higher y-o-y, for 1HFY2024. Adjusted ebitda rose to $344.6 million, up 3.2% y-o-y, while adjusted earnings per share increased to 23.5 cents from 22.2 cents this time last year.

This was in line with RHB’s expectations. “Revenue was driven by treasury income and the fixed income, currencies and commodities (FICC) business, which saw strong growth in volume,” notes Jaiswal. 

FICC is still SGX’s main engine of growth, he adds. “The FICC business as a whole reported robust revenue growth for 1HFY2024, which was mostly driven by increases in commodities volumes (+48%), on-exchange currency volumes (+24%), and over-the-counter, or OTC FX, average daily volume (+46%).”

See also: SGX enjoys FX, iron ore derivatives boost in 1HFY2024; insists spac rules 'work'

Due to this robust expansion, FICC's revenue share increased to around 26% in 1HFY2024 from 21% the year prior. 

Jaiswal predicts the FICC business revenue will keep growing and could overtake all other revenue contributors, “mostly from increased demand for risk management products due to an uncertain macroeconomic outlook”. 

Lack of near-term catalysts

See also: Following SGX's 1HFY2024 results, Citi urges 'sell', Maybank and OCBC maintain 'hold'

UOB Kay Hian Research analysts Llelleythan Tan and Heidi Mo also praise SGX’s FICC segment, which “continued its outperformance”, backed by record-high traded volumes in 1HFY2024.

However, they maintain “hold” on SGX with a lower target price of $10.13 from $10.42 previously, owing to a “lack of near-term catalysts”. 

“Despite robust growth from the FICC segment, we reckon that there are no near-term catalysts to justify a higher valuation. Higher treasury income from interest rate hikes has already started coming through, which we reckon has already been priced-in,” write Tan and Mo in a Feb 2 note. 

Despite a moderate yield of about 3.7%, they still like SGX for its “resilient” business model that benefits from the global economic uncertainty.

However, Tan and Mo recommend waiting for better entry points.  

Leaning on FX and commodities

CGS-CIMB Research analyst Andrea Choong is a tad more critical, keeping “hold” on SGX but trimming her target price to $10.50 from $10.60 previously. 

For more stories about where money flows, click here for Capital Section

In a Feb 1 note, Choong thinks SGX is “leaning on FX and commodities”. “1HFY2024 overall derivatives volumes were supported by interest rate forex (+25% y-o-y) and commodities (+50% y-o-y), but was weighed down by equity derivatives (-13% y-o-y).”

That said, the overall fee per contract for equity, currency and commodity derivatives was still comparable y-o-y in 1HFY2024 at $1.54, says Choong. 

SGX’s cash equities SDAV dipped 2% y-o-y to $0.96 billion in 1HFY2024 as investment sentiment remained weak, she writes. 

Meanwhile, equity derivatives revenues declined 7% y-o-y, as trading volumes fell 14% y-o-y, led by GIFT Nifty and China A50. Excluding Nifty, given its migration to the GIFT (Gujarat International Finance Tec-City) Connect, trading revenues decreased just 5% y-o-y. 

According to SGX, the post-migration Nifty is running smoothly, with open interest exceeding 240k contracts (US$11 billion notional) in December 2023. 

SGX expects trading volumes to return to pre-migration levels in 12 to 18 months as high volume traders and their related infrastructure get onboarded.

PhillipCapital downgrades SGX

Finally, PhillipCapital Research analyst Glenn Thum downgraded SGX to “accumulate” with a lower target price of $10.53 from $11.71 previously. 

That said, Thum’s fair value estimate is the highest among research houses here. It exceeds both Citi Research’s $9 and Maybank Securities’ $10.09 target prices, which The Edge Singapore covered on Feb 1

SGX is cautious on the near-term outlook as global growth prospects appear muted due to rising geopolitical tensions and economic divergence, writes Thum in a Feb 5 note.

“As such, SGX has guided FY24 expense growth to be similar to the 3% YoY expense growth in 1HFY2024, lower than the previous guidance of mid-single digit. The higher expenses are mainly from the buildout of their OTC FX business and higher staff costs from salary increments.”

Apart from the banks, SGX is another beneficiary of higher interest rates, and treasury income is expected to remain high with higher-for-longer rates, says Thum. 

As at FY2023, SGX reported an average $12.6 billion float from collateral and $137 million of interest income, which represents 20% of FY2023 profit before tax. 

In comparison with the previous record high treasury income in FY2020, SGX reported interest income of $135 million and earned a yield of 101 basis points (bps) on collateral balances when the Fed fund rate peaked at 2.50%. SGX’s yield was 109 bps in FY2023.

“We believe there is a huge upside in their treasury income with the potential to further increase with the current high-interest rate environment,” says Thum. 

As at 10.45am, shares in SGX are trading 3 cents lower, or 0.32% down, at $9.40.

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