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Broker's take: RHB maintains 'buy' on SGX, expects good earnings growth

BROKER RHB has maintained its "buy" call on the Singapore Exchange (SGX) with a target price of S$9, representing a 20 per cent upside. 

As at 1.57pm on Tuesday, the counter was trading at S$7.46 apiece, down 0.3 per cent or two Singapore cents. 

The SGX will be releasing its results for fiscal year 2018 on July 27, after market close.

RHB noted that Bloomberg data indicating that SGX's fiscal 2018 securities average daily value (SADV) of S$1.24 billion is in line with its expectation of S$1.2 billion, and higher than fiscal 2017's S$1.12 billion. 

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Though July 2018's month-to-date SADV of S$1.11 billion was weak, RHB analysts noted that it could have been partly due to the Fifa World Cup that led to lower trading volumes. 

Looking ahead, the analysts are bullish on the Singapore bourse's SADV, and have assumed SADV of S$1.39 billion for fiscal year 2019. 

"Global developments, including further hikes in the US Federal funds rate and trade war concerns, could stimulate more switching of stock holdings in investors' portfolios, and in turn generate trading volume," said RHB analyst Leng Seng Choon.

The broker is also forecasting derivatives average daily volume (DADV) of 0.82 million for fiscal 2019, after factoring in some negatives from the trading of India's Nifty 50 index futures, which accounts for 11 per cent of SGX's total derivatives traded volume.

In addition, RHB is expecting good earnings growth and a strong balance sheet, alongside an attractive dividend yield from the counter. 

"SGX’s FY19F dividend yield of 4.6 per cent is almost double that of Singapore's sovereign 10-year bond yield of 2.42 per cent. We are forecasting FY2019 net profit growth of 9.7 per cent. SGX is in a net cash position and has a monopoly over the trading of Singapore equities."

RHB also noted that its target price is based on a fiscal 2019 P/E (price-earnings ratio) of 24 times, or one standard deviation above the three-year mean of 22.2 times. 

Nonetheless, key risks include global economic fluctuations and geopolitical developments.

The outcome of the arbitration between the SGX and the India Index Services and Products Ltd could also impact future derivatives trading volume and hence earnings, RHB said.