Broker's take: Maybank Kim Eng initiates coverage on SGX with 'buy'

MAYBANK Kim Eng (MKE) has initiated coverage on Singapore Exchange (SGX) with a "buy" rating, and a target price of S$10.77, in a research note dated Monday.

"SGX has evolved from a cash-equities exchange to a pan-Asian, multi-asset platform offering derivatives, fixed income and alternative products," Thilan Wickramasinghe, head of research at MKE wrote. "This positions it to benefit from multiple structural trends that are driving demand for risk-management products".

He noted that SGX has built deep liquidity pools and sizeable market share in key risk management derivative products, which gives it a competitive advantage over regional exchanges

The brokerage said SGX's non-cash equities businesses contributed 62 per cent of revenues in FY2020 from just 38 per cent in FY2012. It estimates the revenue share to rise to 74 per cent by FY2023, underpinned by higher volumes in SGX's product suite of index, foreign exchange and commodity derivatives.

MKE expects risk management-driven derivative volume to continue to rise, driven by factors such as rising market volatility and stricter regulations. These factors can allow for complementary positioning of SGX's product offerings, it said.

MKE also said that SGX has built a comprehensive product suite that provides investors with opportunities to manage risks as the operating environment in Asian markets evolve.

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It added that a critical success factor SGX has built up is to support deep liquidity in its key product offerings. "We believe that once a strong level of liquidity is created within a trading venue, it is harder for a rival to come in and take away market share - even if the pricing is competitive," MKE said.

On the other hand, the brokerage noted that SGX's cash equities business is "ex-growth", with delistings outpacing initial public offerings by 40 per cent since FY2012.

Over the last 10 years, SGX cash-equities revenue have contracted at a 1 per cent compound annual growth rate, MKE said. While FY2020 delivered higher revenue from a Covid-19 trading boost, it believes it to likely be an exception rather than the rule.

The brokerage expects segment contributions to continue to contract going forward, primarily due to limited hinterlands available to SGX to keep cash equity momentum supported, and limited sectors offering attractive listing valuations.

Still, the segment could continue to provide a key support for dividend visibility going forward, MKE said, as the segment offers strong operating leverage.

The brokerage estimates that revenue generated above a market average daily value (ADV) of S$580 million will flow directly to earnings before interest, taxes, depreciation and amortisation. It noted that the ADV for SGX has been twice the S$580 million level for the past five years.

"We believe this segment - while seeing low growth - should continue to be a key support for dividend visibility going forward."

MKE also said that SGX has room to add more growth through acquisitions. It noted that SGX's debt-to-equity ratio, at 24 per cent, is lower compared to an average ratio of 67.5 per cent among peers.

"In a scenario where SGX gears up to peer average levels, we estimate the group should have an incremental S$539 million available for acquisitions and investments," MKE said.

The S$10.77 price target for SGX is based on a blended target price methodology, combining multi-stage discounted cash flow, and a peer basket price-to-earnings ratio driven methodology.

SGX traded at S$9.10 as at the noon break on Thursday, unchanged from the previous close.