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Should investors take up SGX’s scrip dividend?

Jeffrey Tan
Jeffrey Tan8/12/2021 03:15 PM GMT+08  • 5 min read
Should investors take up SGX’s scrip dividend?
SGX says the scrip dividend will allow shareholders to participate in the company’s medium term growth journey.
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Since adopting a multi-asset exchange strategy a couple of years ago, the Singapore Exchange’s (SGX) performance has improved steadily. Its margins have widened and return on equity has increased. Its cash pile, too, has grown a lot bigger. To reward shareholders, SGX has given out higher dividends each year.

But now, the bourse operator is putting in place a scrip dividend scheme from FY2022 ending June 30 onwards, which will offer shareholders the option to reinvest their cash dividends in SGX shares. This comes in the wake of several acquisitions made by the company to grow its fixed income, currencies and commodities (FICC) business. SGX had also recently announced a weaker set of results for FY2021 ended June 30.

SGX says the scrip dividend will allow shareholders to participate in the company’s medium term growth journey. Yet a scrip dividend may indicate that the company is conserving capital. Should shareholders take up the scrip dividend?

For starters, a scrip dividend is a dividend given out in the form of shares instead of cash. It is usually priced at a discount to the market price to entice shareholders to subscribe. The discounts typically range between 0% to 10% among scrip dividends issued by locally listed companies, according to Ng Yao Loong, CFO of SGX.

But for SGX, the company has yet to decide on the discount, though Ng believes that it will likely be at the lower end of the range. More importantly, he highlights that the scrip dividend is an opportunity for shareholders to share in the company’s growth ahead.

“What I believe is that we have an attractive growth story and what we are providing is an option for investors to participate in a very cost-effective way to reinvest and grow together with us. So, it’s a total return story,” he says at SGX’s FY2021 results briefing on Aug 5. “It’s not about shoring up our liquidity.”

Loh Boon Chye, CEO of SGX, agrees, noting that the company’s businesses are “cash generative”. He says the company has free cash flow of almost $150 million, net the payment of dividends for the financial year. The company also does not have to resort to dipping into its purse as it still has room to take on more leverage, he adds.

Still, analysts are not entirely convinced. JPMorgan calls the introduction of the scrip dividend as the “most contentious” aspect of SGX’s FY2021 results briefing. “If the discount is kept at zero, then it will boost the case for scrip being a tool for shareholders willing to reinvest. In case there is even a small discount, it will suggest capital retention and, hence, a negative,” JPMorgan analysts Harsh Wardhan Modi, Daniel Andrew Tan and Gaurav Khandelwal write in an Aug 5 note.

Whatever the case, shareholders considering the scrip dividend will also need to weigh SGX’s growth prospects ahead. On July 23, SGX announced that it is acquiring MaxxTrader for US$125 million in cash ($169.9 million).

MaxxTrader, which is headquartered in Singapore, is part of FlexTrade Systems, a global leader in multi-asset execution and order management systems. MaxxTrader is a leading provider of foreign exchange (FX) pricing and risk solutions for sell side institutions such as banks and broker-dealers, as well as a multi-dealer platform for hedge funds.

According to SGX, MaxxTrader will accelerate its plan to build an integrated FX ecosystem and marketplace that facilitates global access to over the counter (OTC) and on-exchange currency derivatives. MaxxTrader’s strong sell-side client base, it adds, will complement the buy-side clientele of BidFX, a cloud-based provider of electronic FX trading solutions which SGX fully acquired last year.

SGX will also enhance its bond offerings via Trumid XT, an electronic bond trading platform. This came after Asian Gateway Investments (AGI) — a subsidiary of SGX — signed an agreement with Trumid Holdings, HH THL Holdings (Hillhouse) and other undisclosed parties on Feb 8. Under the agreement, a JV company called XinTru will be incorporated in Singapore.

XinTru will launch and operate Trumid XT, which aims at enhancing liquidity and execution in the Asian bond market for global clients. The JV will combine each member’s respective strengths to the benefit of fixed income investors.

SGX’s data, connectivity and indices business will also likely see growth ahead. On May 20, the bourse operator announced that it will jointly develop Climate Impact X (CIX), a global carbon exchange and marketplace, with DBS Bank, Standard Chartered and Temasek Holdings. Through CIX, organisations will be able to buy and sell carbon credits.

SGX has also developed Marketnode, a joint venture between the company and Temasek. Marketnode leverages distributed ledger technology to connect various parties involved in the transaction — from issuers to investors — and to tokenise bonds.

Following SGX’s results, there are three “buy” calls from the analysts, 10 “holds” and three “sell”, according to Bloomberg data. Their target prices range from as low as $9 by Morgan Stanley to as high as $12.80 as estimated by Macquarie.

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