SINGAPORE (Oct 7): Phillip Securities Research is maintaining Singapore Exchange at “accumulate” as the bourse operator rides on the wave of structural global growth in derivatives.

“We are positive that SGX’s diversified suite of derivative products will sustain growth in 2020,” says analyst Tin Min Ying in an Oct 1 report.

Derivatives has been the main contributor to SGX’s revenue. In FY19, revenue contribution from derivatives grew to 51% from 30% in FY14, while total revenue grew 32% in the same time. Derivatives revenue tripled to $460 million in the last decade with CAGR of 11%. In FY19, securities accounted for 20% of revenue compared to 40% of revenue 10 years ago.

Tin says the rising popularity of derivatives is a trend observed in emerging markets in the Asia Pacific region (APAC) and not just in Singapore.

The growth of derivatives is sustained by the globalisation of markets and institutions that require risk management and hedging tools.

“SGX’s diversified product suite allowed investors to access otherwise hard-to-reach onshore market in emerging markets, namely SGX’s India and China equity derivatives,” says Tin.

The FTSE China A50 Index Futures remain the main driver of SGX’s volume, accounting for 44% of total derivatives volume in FY19.

In March, Hong Kong Stock Exchange (HKEX) announced plans to launch futures contracts on the MSCI China A Index. This has potential to impact SGX earning although the plan is still awaiting Mainland regulator approval.

Although HKEX will be the preferred source for contracts for international investors in China given its proximity, SGX offers margin offsets across correlated products, creating cross margining efficiencies.

“A vast majority of SGX’s clients trade a range of products and SGX expects its long track record to be strong enough to retain clients,” says Tin.

In addition, SGX continues to diversify its revenue streams within derivatives as well. For instance, derivative volumes from FX futures and Iron ore grew from virtually non-existent in FY14 to 15% of total volumes in FY19.

In another positive development, the spat between SGX and the National Stock Exchange of India (NSE). After discontinuing arbitration, both parties have agreed to jointly launch the trading of derivatives based on the Nifty 50 stock index and its constituents at the Gujarat International Finance Tec-City (Gift) by FY2020.

“We maintain accumulate at a higher target price of $8.60 from $8.07 previously. We peg our target price to 22x earnings or 0.5 SD below SGX’s five-year mean,” says Tin.

“The higher target price is due to an upward adjustment in our FY20-21 DDAV forecast by +2% (to 1,140k) and +4% (to 1,283k) respectively.”

Year to date, shares in SGX are 17.3% to $8.41.