Brokers' take: Jefferies upgrades SGX to 'buy' on higher trading volumes, reasonable valuation

THE Singapore Exchange (SGX) S68 has a favourable risk-to-reward profile due to its potential for higher trading volumes and its reasonable valuation, said Jefferies on Tuesday (Jan 4).

Equity analyst Krishna Guha upgraded SGX to a "buy" call from "hold", and raised its target price to S$10.80 from S$10, as he expects higher trading volumes and treasury revenue.

He noted that the bourse operator currently trades at 21.8 times the consensus' estimates for SGX's earnings in the next 12 months, and its share price has also fallen around 15 per cent in the past 6 months.

Shares of SGX were trading at S$9.50 as at 4.23 pm on Wednesday (Jan 5), up S$0.17 or 1.8 per cent.

Guha noted concerns that average daily volumes on the SGX will be hit by investors pulling liquidity out of SGX-listed counters when foreign-listings - such as US-listed Sea - are included in the MSCI Singapore Index.

However, he said the concerns have not played out so far, and estimated that the reduction in weight from the banks equals to less than a couple of days of turnover for the counters.

Instead, the inclusion of globally-listed Singapore companies on the index should increase the weight of new economy stocks and boost the Singapore market's weight on the MSCI Asia ex Japan Index, which in turn should bring liquidity into the MSCI Singapore Index futures and the cash market, Guha said.

In fact, potential listings of special purpose acquisition companies (SPACs), potential fixed asset investments in China and rising rates should boost cash equity and commodity-derived volume. Guha raised his average daily volume assumptions for the financial year ended 2023 to S$1.5 billion from S$1.4 billion.

As for low iron ore prices, Guha expects higher capital expenditure will boost the prices and associated derivative volumes for SGX iron ore futures, while declining treasury revenue on the SGX should gain from higher rates and index levels.

Additionally, the analyst noted concerns that the launch of the Hong Kong Exchange's MSCI China A-share futures contract will weigh on near-term product volumes and margins, as it competes directly with SGX's A50 futures contract.

However, he said the monthly trading average of the contracts is just down 7 per cent of its monthly average of the past 12 months, while open interest has marginally inched up in the same period.

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