Analysts are keeping their calls intact after Singapore Exchange S68 (SGX) reported a net profit of $597.9 million for the FY2024 ended June 30, 4.7% higher y-o-y. Adjusted earnings – or net profit attributable to equity holders of the company – grew by 4.5% y-o-y to $525.9 million.
Earnings for the 2HFY2024 rose by 10.5% y-o-y to $316.3 million while adjusted earnings for the same period rose by 3.0% y-o-y to $274.5 million.
That said, most of the analysts within this article have increased their target prices after the exchange ended FY2024 on a “firm footing”.
DBS Group Research analyst Lim Rui Wen and its Singapore research team were the exception as they kept their “hold” call with an unchanged target price of $10.20, even though the team remains positive on the exchange in many aspects.
SGX’s 2HFY2024 net profit surpassed the team’s expectations on non-operating items. SGX’s higher quarterly dividend of 9 cents per share, from 8.5 cents per share, was also a “positive step”.
Looking at the exchange’s results, Lim and team note that its currencies & commodities business appears to be a “bright spot” with a strong momentum in derivatives and mainly from iron ore futures and currency futures. Over-the-counter (OTC) foreign currency (FX) also contributed to the strong momentum.
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“The derivatives business is a growing revenue driver, accounting for more than half of its current revenue compared to just 26% in FY2009,” the DBS team notes in its Aug 12 report. “Contributions from currencies and commodities derivatives continue to grow, from 21% in 1HFY2020 to now accounting for 41% of total derivative volumes in 2HFY2024. Equity derivatives account for 59%.”
“SGX aims to strengthen its franchise by becoming Asia’s largest one-stop venue for FX and retaining its leadership in iron derivatives,” the team adds.
In addition, the team is on the lookout for any developments from the review group set up by the Monetary Authority of Singapore (MAS) on Aug 2. The group, which is made up of 10 leaders from the private and public sectors, will recommend measures to boost Singapore’s equities market within a year.
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“Securities daily average value (SDAV) has been known to be a key driver to SGX’s stock price as it translates into commissions and revenues,” says the DBS team.
“While the FY2021 SDAV of $1.35 billion was a high base due to heightened market volatility, SDAV declined for the third consecutive year in FY2024 to $1.06 billion. We continue to keep watch for any developments arising from the MAS review group to rejuvenate the markets,” it adds.
The team is also on the lookout for companies which have begun preparing for their initial public offerings (IPOs) on SGX with the change in macro environment, which should another plus for SGX with FY2023 and FY2024 being a “very low base” for IPOs.
In FY2025, SGX’s management expects its expenses for the year to grow by 2% to 4% y-o-y. The figure excludes transaction-based expenses such as processing and royalties’ expenses. It adds that it expects to achieve positive operating leverage as the group’s expense growth is expected to be in the low to mid-single-digit percentage compound annual growth rate (CAGR) in the medium term, says the team.
“Capital expenditures (capex) is anticipated to be approximately $70 million - $75 million in FY2025 and is expected to further increase in the medium term due to continued investments in the modernisation of exchange trading and clearing platforms as well as data centres,” it adds.
Another exception was Macquarie Equity Research analyst Jayden Vantarakis, who rated SGX “outperform” with an unchanged target price of $10.80. SGX’s results and dividend were in line with his expectations, says the analyst in his Aug 8 flash note.
“FX was the standout with FX futures outstanding interest up 76% to US$27.6 billion ($36.6 billion). Over-the-counter FX average daily value rose to US$111b, up 46% y-o-y. Securities clearing fees were stable at 2.49 basis points,” he writes.
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While SGX’s dividend increase matched his expectations, the analyst notes that SGX could’ve done better with its dividend as the payout ratio remained “low” at 62% for the full year.
“SGX's guidance is to raise dividends per share by mid-single-digit in the medium term, subject to earnings growth,” he notes.
Further to his report, Vantarakis noted that though SGX changed its revenue model for the NIFTY 50 following the migration to the GIFT Nifty joint venture model, SGX’s average fee per contract remained “fairly stable” on a like for like basis at $1.54 contract in FY2025 relatively to the $1.56 per contract. on a pro-forma basis with the change applied to FY2023’s figures.
In the second half of this year, the analyst likes SGX as a “volatility hedge”. In a July 30 report, the analyst said “volatility events” such as the US elections will benefit SGX’s derivatives franchise, something which sets it apart from its Asia Pacific (APAC) peers as SGX has two times the revenue contribution from its derivatives business.
“We believe [the] Singapore dollar (SGD) strength and a flight to quality could benefit Singapore equities through 2H2024, presenting upside potential to velocity,” he said at the time.
Lifted target prices
Meanwhile, analysts from PhillipCapital, RHB Bank Singapore and OCBC Investment Research (OIR) have all raised their target prices.
PhillipCapital analyst Glenn Thum has kept his “accumulate” call as SGX’s 2HFY2024 revenue of $639 million met his expectations while adjusted patmi of $275 million for the same period fell below his estimates.
FY2024 revenue stood at 99% of Thum’s estimates while adjusted patmi came in at 90%.
“The variance came from higher-than-expected fixed income, commodities and currencies (FICC) revenue offset by lower equities – derivatives revenue,” says Thum in his Aug 12 report.
The analyst has raised his target price to $10.78 from $10.53 previously as he ups his FY2025 earnings estimates by 4%. The increased earnings estimate comes on the back of higher revenue estimates from SGX’s FICC – currency and commodities and market data and connectivity. His target price is pegged to -1 standard deviation (s.d.) of SGX’s five-year mean or FY2025’s P/E of 18.6 times.
“We expect SGX to maintain stable growth from currency derivatives volumes and its OTC FX business pillars as they acquire new clients across Europe and Asia Pacific while keeping expense growth contained. However, it will face headwinds to treasury income from the expected rate cuts in 2HFY2024 and continued decline in equity derivatives volumes,” says Thum.
RHB Bank Singapore analyst Shekhar Jaiswal is remaining “neutral” on SGX as the group reported “moderate earnings growth” for the full-year. That said, SGX’s core profit for the FY2024 stood 5% above Jaiswal’s estimates due to better cost control and higher-than-estimated other income.
On this, the analyst has increased his FY2025 – FY2026 profit estimates by 5% to 6% to account for better revenue and higher margins. However, he sees downside risks to his treasury income estimates amid potentially lower interest rates.
Looking ahead, Jaiswal expects revenue for SGX’s derivatives business to “significantly exceed” the growth in its revenue for its securities business.
Within the derivatives business, we expect volumes for currencies and commodities to significantly exceed the volumes for equity derivatives, with currencies and commodities derivatives volumes surpassing equity derivatives volumes before the end of FY2027,” he writes in his Aug 12 report.
“FICC revenue should register a 14% CAGR during FY2024 – FY2027. Overall revenue should grow at a 5% CAGR during the same period,” he adds. “Thanks to margin expansion, recurring products should grow at a 6% CAGR for FY2024 – FY2027. We estimate dividend per share (DPS) to grow at a 4% CAGR during the forecast period. SGX expects (and we agree) an increase in equity listings in the coming years.”
At this point, SGX’s forward yield of 3.6% and FY2027 yield of 4.0% remain “unexciting” to the analyst, compared to the yield of Singapore’s equity market.
Jaiswal’s new target price of $10.80 from $10.40 previously, is valued at 21 times its forward P/E, which is in line with SGX’s historical average.
“Our target price includes a 6% environmental, social and governance (ESG) premium to its fair value of $10.20,” he says.
The research team at OIR has kept its “hold” call with a higher target price of $10.76 from $10.69 previously. SGX’s core patmi for the FY2024 met the brokerage’s expectations at 99.5% of its full-year estimates.
“After factoring in SGX’s latest full year results and fine-tuning our assumptions, we lift our FY2025 core patmi forecasts by 0.7% to $551.4 million. Our revised projections translate to growth of 4.9%,” says the team in its Aug 12 report.
Shares in SGX closed 5 cents lower or 0.51% down at $9.77 on Aug 12.
