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Derivatives trading supports SGX's earnings; ongoing momentum seen this year

Samantha Chiew
Samantha Chiew2/9/2023 11:01 PM GMT+08  • 5 min read
Derivatives trading supports SGX's earnings; ongoing momentum seen this year
SGX's results briefing on Feb 9. Photo: Albert Chua/ The Edge Singapore
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Led by higher derivatives volume, the Singapore Exchange Group (SGX) S68 %

has reported an adjusted net profit gain of 7% to $236.8 million for its 1HFY2023 ended December 2022. Revenue in the same period was up 10% to $571.4 million. The local bourse operator is keeping its quarterly dividend of eight cents per share, in line with guidance.

“We are pleased to deliver a set of financial results that underscores SGX Group’s relevance to global investors,” says CEO Loh Boon Chye at the briefing on Feb 9.

“Our derivatives business has continued to outperform with a 28% y-o-y increase in revenue, driven by broadbased gains across asset classes and record volumes in key contracts. Notably, for commodities, we accelerated the financialisation of iron ore and expanded our service offering,” he adds.

Derivatives, as a whole, contributed to 44% of the group’s total revenue. Revenue from derivatives aggregated across the different asset classes grew 28% of $52 million. “The outperformance of this segment reflects the value that global investors place on SGX as a platform for Asian access and portfolio risk management,” says SGX’s CFO Ng Yao Loong.

However, capital raising, both IPOs and secondary offerings, as well as cash equity trading, were down. “Not surprising like many other cash markets our securities trading and capital raising activities saw lower growth,” says Ng, as fixed income, listings and IPOs, cash equities trading and post-trade activities all saw lower growth.

Adjusted ebitda rose to $334.1 million from $309.6 million, while adjusted earnings per share climbed to 22.2 cents from 20.7 cents. Adjusted figures exclude certain non-cash and non-recurring items that have less bearing on SGX’s operating performance.

See also: Second Chance set to report higher 1HFY2023 net profit

Under SGX’s definition, adjusted net profit excludes non-cash items such as a $27 million fair value gain from its investment in 7RIDGE fund, a $14.9 million writeback of earn-out contingent consideration for MaxxTrader and a $10 million recognition of investment in Climate Impact X (CIX).

MaxxTrader was acquired by SGX in January 2022 in a bid to expand into the global FX OTC market. As explained by Ng, MaxxTrader’s 2022 revenue did not meet the qualifying threshold. “This mechanism is designed to protect us as the acquirer from overpaying and to help bridge price differences between the buyer and seller at the point of acquisitions,” explains Ng, adding that this $14.9 million in cash will hence not be paid to the seller and will not have an impact on the carrying value of MaxxTrader on SGX’s books.

Total capital expenditure was $17.8 million, up from $16.5 million last year. These investments include the setting up of OTC FX infrastructure and upgrades to the group’s Titan OTC trade reporting system.

See also: SIA group wide load factor for Feb was 86.6%, down 0.3% over Jan

While guidance for FY2023 expenses and capital expenditure remains unchanged, barring unforeseen risks, SGX expects full-year expense growth and capital expenditure to be at the lower end of earlier guidance of a 7%–9% increase and $70 million–$75 million, respectively.

SGX plans to keep up the growth momentum it is enjoying from products such as steel and iron ore derivatives trading. In 2022, iron ore contracts enjoyed a record year, as it cleared about three billion tonnes, which Loh explains is equivalent to a DAV (daily average volume) of close to 100,000 contracts a year.

“We are at the start of our journey to grow and entrench our key commodities. Not only in iron ore, but also in freight as macroeconomic proxies. We will continue the ecosystem and as liquidity deepens, drive further of our contracts in benchmark indices that could potentially lead to the issuance of structured products for investors,” says Loh. Container freight contracts are expected to be launched on Feb 20.

“No matter the macroeconomic conditions, investors need to invest and hedge — our multi-asset offering is well-placed to support them with liquid and efficient access to Asian opportunities. We will continue to ramp up our client coverage in the US and Europe to capture the uptake in activity, especially on the back of China’s reopening,” says Loh.

On the securities and fundraising front, Loh is optimistic that activity will rebound as economic sentiments improve. Pol de Win, SGX’s head of global sales and origination, notes that 2022 has been an extraordinary and unusual year, as market activities globally saw low activity levels. “But we know that markets don’t remain short forever,” says de Win, who does not expect to see markets boost in the near term due to the reopening hype, but is optimistic in the mid- and long-term prospects.

“Probably towards the end of this upcoming results season, we may see some activity from other parts of the world. But a lot of this is linked to the macro outlook. The consensus is for 2Q2023 to see a stabilising rate environment, which is very important for IPO activity. So, I expect on the back of that for markets to come back towards the second half of the year,” says de Win.

Photo: Albert Chua/ The Edge Singapore

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