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Broker's take: DBS raises SGX's target price on index firm acquisition

DBS Group Research has maintained its "buy" call on the Singapore Exchange (SGX) while raising its target price to S$9.60, up from S$8.90 previously.

The revised price target represents a 9 per cent upside from the Singapore bourse operator's Jan 23 close of S$$8.82. 

As at 11.07am on Friday, shares in SGX were trading at S$8.83, up one Singapore cent or 0.1 per cent on a cum-dividend basis. 

In a research note on Friday, DBS noted that SGX's 186 million euro (S$280 million) acquisition of Scientific Beta, a smart beta index firm, is set to propel the bourse operator's index business. 

According to DBS, the acquisition is expected to be largely complementary, as SGX is able to broaden its existing index offering in a fast-growing index space, capitalising on the broader growth of passive investing.

There are also potential links with SGX's product platform and opportunities for cross-selling, given Scientific Beta's relationships with more than 60 asset owners and asset managers, analyst Lim Rui Wen wrote.

SGX is targeting to double revenue from its data, connectivity and indices (DCI) segment as well as its fixed income, currencies, commodities (FICC) segment in the next five years, as it looks at investment opportunities and bolt-on acquisitions to fuel growth. 

"We believe SGX will continue to benefit from strong demand for risk management instruments, as it continues to execute growth strategies to build a multi-asset exchange," said Ms Lim.

On Thursday, SGX also reported a second-quarter net profit of S$99 million, up 3 per cent from S$96.5 million a year ago. This was ahead of consensus, with strong growth in the FICC and DCI segments supporting weaker performance from equities, DBS noted.

Revenue stood at S$230.9 million, versus S$224.2 million a year ago. This was SGX's highest Q2 net profit and revenue in the last five years.

Overall, DBS is of the view that SGX's share price should continue to be well-supported by its absolute dividend of 30 Singapore cents per year which implies a yield of about 3.4 per cent at the current level, amid a lower yielding market environment.

Nonetheless, key risks to this view include competition in SGX's derivatives business.

DBS noted that SGX may see potential earnings downside should it face competition from the Hong Kong stock exchange, which announced in March 2019 that it is planning to launch futures contracts. "These may compete with SGX's FTSE China A50 Index Futures, which accounts for about 40 per cent of SGX's total derivatives volume," DBS said.