Singapore Exchange Limited SGX: S68 - Soft Near-Term Earnings Outlook
NEUTRAL, new SGD10.40 TP from SGD10.00, 7% upside, as we roll forward our valuation basis to FY23F. While higher treasury income from US Federal Reserve (US Fed) rate hikes, as well as improved data, connectivity and indexes (DCI) and fixed income, currencies and commodities (FICC) revenue should support higher FY23F profit, FY22F earnings could remain soft amidst higher cost growth and a weak cash equities turnover. While global macroeconomic uncertainties could lead to better-than-expected trading volumes, we note the stock is trading above the historical average P/E.
YTD FY22 market statistics tracking our estimates. SGX has seen a YoY decline in cash equities turnover over the last two months (March and April). The securities daily average value (SDAV) came in at SGD1,554m (down 8% YoY) and SGD1,271m (down 1% YoY) respectively in March and April. This brings the YTD SDAV to SGD1,274m for FY22, which is c.5% higher than our FY22F SDAV of SGD1,219m. SGX’s derivatives segment saw a sharp uptick in trading activity, with average daily trading volumes (DDAV) of 1.14m (+11% YoY) and 1.04 (+25% YoY) in March and April. YTD DDAV is tracking c.2% below our FY22F estimates.
Our FY22 estimates are above consensus’. We estimate SGX will report SGD625m of EBITDA and SGD447m of profit in FY22F. This is higher than the consensus estimates of SGD608m and SGD434m, respectively. As our revenue estimate is in line with consensus’, we believe Street may be factoring in higher operating costs for FY22F.
Reasonable valuation; rolling forward the valuation to FY23F. SGX’s FY23F P/E is above its historical average (Figure 3) and offers a modest yield of 3.3% (STI’s yield is +4%). Our TP of SGD10.40 is now based on 22x (earlier 23x) FY23F (earlier FY22F) EPS. The TP includes an ESG premium of 8% over its fair value of SGD9.60. Our target P/E is now in line with its historical average P/E.
Including earnings and TP sensitivity on FY23 estimates. As the uncertain macroeconomic environment could persist well beyond Jun 2022 and likely boost SGX’s earnings, we have included the FY23F earnings and TP sensitivity analysis in Figure 1 and Figure 2.
Risks. Downside risks: i) Higher operating costs for FY22F; ii) slower ramp up in revenue contribution from recent acquisitions. Upside risks: i) Higher-than-estimated SDAV from the potential pipeline of ETFs, REITs, and Special Purpose Acquisition Company (SPAC) listings; and ii) continued global macroeconomic uncertainties leading to better-than- expected derivatives volumes.
Source: RHB Research - 27 May 2022
