CFA Society Singapore
SINGAPORE (Feb 12): Shares in Singapore Exchange (SGX) opened at $7.40 -- nearly 7% lower than its Friday closing price of $7.89 -- following news that the Indian stock exchanges are intending to restrict the usage of Indian indices and market data by foreign exchanges, indices and data providers.
The move will prevent SGX from continuing to offer derivatives based on India’s benchmark Nifty 50.
To recap, Singapore’s bourse on Sunday issued a press release in response announcing that it would take steps to maintain market continuity and develop other complementary products in light of the recent development.
Global investment bank Jefferies issued a note this morning saying it does not anticipate any immediate change on dividends as it awaits the launch of new India-access products by SGX.
The research house is maintaining its “buy” call on the stock with a target price of $8 while recommending investors to observe the announcement's impact on the MSCI, and whether any such changes would affect trading of related products on SGX in turn.
"Apart from impact on clearing fees due to lower turnover, interest income from deposited collateral will be reduced due to lower open interest. There may be a second order impact on trading of INR futures and benefits of product cross-margins," explains analyst Krishna Guha of Jefferies Singapore.
"On the flip side, SGX will save on licensing fees, royalties and other variable costs linked to SGX Nifty products. Suffice to say that there are ample puts and takes which impact financial metrics. In absence of launch of other complementary products, we estimate earnings will be impacted mid to high single digits in medium-term," he adds.
Meanwhile, OCBC analyst Carmen Lee says she expects the news to dampen SGX’s share price in the near-term.
The research house has maintained its “hold” call on the stock with a fair value estimate of $8.16 which is below the 12-month average consensus target price of $8.48.
“The SGX Nifty 50 Index Futures accounted for about 11.5% of SGX’s derivatives volume in 2QFY18 and is the third largest in terms of volume, after the SGX FTSE China A50 Index Futures and the Japan Nikkei 225 Index Futures. We expect this news to result in a knee-jerk reaction on SGX’s shares this morning and drag the price below Friday’s closing price of $7.89,” says Lee.
DBS has similarly acknowledged a possible downside risk to SGX's earnings trajectory from FY19F in the scenario that nothing is done to compensate for the loss of contributions post the announcement. After taking out Nifty and MSCI India from the bourse's financials, FY19F net profit is estimated to see a 7% decline, which would subsequently result in a 6% decline in its fair value estimate.
The research house has nonetheless maintained its "buy" rating on the stock with a target price of $8.90, which is based on the dividend discount model, implying 21 times FY19F P/E.
This comes on the belief that its stock price should still be supported by its stable and sustainable dividend yield of 4%, along with the bourse's efforts to drive market liquidity and new product initiatives which DBS says should bear fruit in the coming years -- including the recently-announced trading link with Bursa Malaysia.
As at 10.52am, shares in SGX are trading 6.7% lower at $7.36 or 24 times FY18 earnings.