JEFFERIES Singapore has called a "buy" on Singapore Exchange Ltd (SGX), pegging its target price at S$8 a share on expectations that a strong growth in derivatives volume will mitigate the weak performance in its securities market.
At 11am on Wednesday, SGX was trading around S$6.86 a share, up one cent on 341,000 shares traded.
The research house noted that mutual stock market access between China and Hong Kong, through the Shanghai-Hong Kong Stock Connect, can further fuel growth in SGX's ChinaA50 futures.
"Due to high correlation of 94 per cent between China Shanghai Shenzhen 300 Stock Index futures and ChinaA50 futures and USD denomination, ChinaA50 volumes may get some boost from HK-SHG Connect," said Krishna Guha, Jefferies' equity analyst. "On the back of a steady 4 per cent yield and possible normalisation of volumes and volatility, we maintain our 'buy' rating."
Mr Guha noted that SGX has opened a full-fledged sales office in Hong Kong and is targeting end-users by signing them up as members of exchange and also contemplating setting up an office in the Shanghai free trade zone.
Healthy growth in derivatives volumes and open interest of iron-ore products should also offset weaker securities turnover.
Mr Guha said the reduction of board lot size from January next year to 100 shares, from 1,000 shares now, should bring back securities turnover to S$1.1-1.2 billion.
SGX is expected to release its fiscal 2015 first-quarter results on Oct 21. Jefferies is estimating the bourse to generate a net income of S$81.3 million.