Brokers' take: Maybank upgrades SGX to 'buy' despite lower target price

MAYBANK Securities has upgraded its call on Singapore Exchange (SGX) to "buy" from "hold" as it expects an inflection in the bourse's performance given Singapore's "increased relevance as a value-oriented investment destination".

The upgrade comes despite a lower target price of S$11.20, from S$12.27 previously, due to weaker-than-expected treasury earnings for H1 FY2022 as well as lower peer multiples.

In a Monday (Feb 7) report, analyst Thilan Wickramasinghe attributed the lower target price to a 3-13 per cent reduction in estimated profit after tax for FY2022 to FY2024 to account for weaker treasury income and lower equity clearing fees.

He nonetheless sees potential for Chinese and South-east Asian homecoming listings to choose SGX as a neutral listing venue. A stronger-than-expected reception for local SPAC (Special Purpose Acquisition Company) listings could also support market velocity and fees going forward, he added.

"SGX has underperformed so far this year. However, its value-orientation, risk management offering and potential to increase regional relevance as Covid reopening progresses could support an inflection," commented Wickramasinghe.

Despite the drop in treasury income over H1 FY2022, the analyst noted higher volumes in other segments such as fixed income, foreign exchange derivatives, commodity derivatives and equity derivatives.

"Increased uncertainty from monetary tightening, the execution of China's common prosperity policy and rising inflation are likely to increase demand for SGX's derivative suite of products to manage risk," he said.

Wickramasinghe also believes that regional reopening could lead to greater demand to raise capital and reduce exposure to freight and commodity price risks.

Meanwhile, in separate research reports released on Monday, RHB and CGS-CIMB have both maintained their calls and target prices on the stock. CGS-CIMB said it expects fixed income, currency and commodities (FICC) earnings from SGX's acquired businesses to increase as they gain scale. The recent acquisition of MaxxTrader could result in a 20-25 per cent increase in average daily volumes of foreign exchange earnings, it added.

CGS-CIMB reiterated its "add" call on SGX with a target price of S$10.40.

On the other hand, RHB said it "remains positive on the longer-term outlook" for SGX, but believes that the bourse's share price and earnings lack re-rating catalysts in the short term.

RHB highlighted concerns over management guidance for higher operating costs which include expenses related to the acquisition of MaxxTrader. Revenue from such recently-acquired businesses could take time to scale up, said the research house.

Like CGS-CIMB, RHB also sees the risk of increased competition from Hong Kong Exchange's MSCI China A50 Connect index futures, despite SGX's confidence in the expansion potential for its FTSE China A50 index futures.

Securities market turnover could also face moderation as trading volume from SGX-listed stocks may move to Sea upon its full induction into MSCI Singapore in Q1 of 2022, it added.

Nevertheless, RHB continues to like SGX as it is trading at a reasonable valuation, in its view.

The research house maintained its "neutral" call on SGX with a target price of S$9.80.

Shares of SGX were trading at S$9.89, up 5.2 per cent or S$0.49 as at 11.37 am on Monday.