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Broker's take: CGS-CIMB upgrades SGX to 'add' on valuation grounds

CGS-CIMB has upgraded the Singapore Exchange (SGX) to "add" and maintained its target price at S$9.40, citing emerging value in the bourse operator' stock after broad market sell-offs in prior weeks.

Shares in SGX were up S$0.06 or 0.7 per cent to S$9.11 as at 4.04pm on Thursday.

With financial markets facing greater volatility amid the Covid-19 outbreak, the average daily value of securities (SDAV) traded on the SGX grew 11 per cent month-on-month (m-o-m) and 28 per cent year-on-year (y-o-y) to S$1.35 billion in February.

CGS-CIMB analyst Ngoh Yi Sin said the SDAV was last seen at this level two years ago.

Demand for hedging tools like derivatives contracts has also increased amid market volatility, which led to derivatives contracts increasing 23 per cent m-o-m and 32 per cent y-o-y in February to 24 million. Ms Ngoh noted this performance is "slightly ahead of our monthly projected run-rate for FY2020".

Meanwhile, total open interest - the number of outstanding derivative contracts that have not been settled for an asset - continued to recover since December 2019, while improving derivatives’ average contract rates are also a tailwind for SGX, she added.

"Should these positive trends persist, we see potential upside to our/consensus FY2020 numbers," Ms Ngoh said.

That said, there could be headwinds facing SGX's popular China A50 futures product - which contributed 44 per cent of FY2019 derivatives volume and 17 per cent of revenue - due to the possible launch of the Hong Kong Stock Exchange's MSCI A-share futures in the second half of 2020.

"However, we believe this could be mitigated by (SGX's) first-mover advantage, time taken for new products to build liquidity and traction, and potential growth in overall market size," Ms Ngoh said.

Potential upside catalysts for SGX include better-than-expected dividends and faster asset under management growth at its recent acquisition of ScientificBeta, she noted.