Excerpts from UOBKayHian report

Singapore Exchange Ltd (SGX: S68)

• We expect SGX to report higher 1HFY24 revenue (+12% yoy) and adjusted PATMI (+12% yoy), driven by the FICC segment and higher treasury income.
• Both the cash equities and equity derivatives segments are poised to underperform as 1HFY24 total securities traded value and volumes fell respectively.
• The FICC segment is set to post record-high revenue driven by robust volumes.

With a lack of near-term catalysts, we maintain HOLD and a lower target price of S$10.42 (S$10.46 previously).

Weak securities turnover

For 1HFY24, total securities turnover value fell by 11.9% yoy, slightly below our expectation. The larger-than-expected yoy drop was largely due to elevated interest rates suppressing trading velocity, coupled with ongoing global geopolitical tensions dampening investor sentiment. Also, with SGX’s average clearing fee expected to be lower yoy, we reckon that this would lead to a 16% yoy fall in 1HFY24 cash equities trading and clearing (T&C) revenue to around S$75m.

Stable derivatives volume

In line with our expectation, 1HFY24 total derivatives traded volumes were slightly higher at 0.8% yoy, backed by record-high volumes from both commodities (+48.3% yoy) and foreign exchange (+23.8% yoy) derivatives but offset by lower equity derivatives volumes (-13.6% yoy). Total equity derivatives volume was largely dragged by SGX’s FTSE China A50 Index Futures whereby 1HFY24 traded volumes fell by 9.3% yoy. With average clearing fee expected to stay stable yoy, we reckon that stronger 1HFY24 T&C revenue from the fixed income, currencies and commodities (FICC) segment (+28.8% yoy, +S$31m) would offset the fall in 1HFY24 T&C revenue from equity derivatives (-14.0% yoy, - $20m).

Ramp-up in treasury income

We expect 1HFY24 treasury income to surge past preCOVID-19 (FY19-20) levels of S$140m, given that the current Fed funds rate of 5.25-5.50% is double that of FY19-20’s. As a recap, overall treasury income doubled in 2HFY23 to S$92m and we expect 1HFY24 treasury income to surge to around S$130m for 1HFY24, representing roughly 10% of our FY24 overall revenue estimates.

Valuation/Recommendation

Maintain HOLD with a slightly lower PE-based target price of S$10.42 (S$10.46 previously), pegged to the same 21x PE multiple, -0.5SD to SGX’s historical forward mean, to FY24 earnings. Despite robust growth from the FICC segment, we reckon that there are no near-term catalysts to justify a higher valuation. Higher treasury income from interest rate hikes has already started coming through, which we reckon has already been priced in. Despite a moderate yield of about 3.6%, we like still SGX for its resilient business model that benefits from the global economic uncertainty but recommend waiting for better entry points.

You can find the full report here and the company website here.