Brokers' take: SGX price targets slashed on MSCI licence loss, increased competition

THE Singapore Exchange's (SGX) impending loss of most of its MSCI equity index futures and options contracts will likely translate into lower earnings, hindered growth and greater competition in the derivatives space.

This is according to analysts from DBS, OCBC, RHB, CGS-CIMB and Jefferies, who have all cut their target prices (TPs) for the bourse operator - with some downgrading the stock - following news that MSCI will shift index licensing for some derivatives to the Hong Kong bourse.

SGX shares continued their decline on Thursday to trade at S$8.13 as at 3.19pm, slipping 7.1 per cent or S$0.62, with 13.6 million shares changing hands. 

The counter had plummeted 11 per cent on Wednesday to a two-month low, after the Singapore bourse operator announced it will stop its MSCI equity index futures and options contracts - save for those under MSCI Singapore - when their licences expire in February next year.

Most of the analysts slashed their earnings forecasts by at least one-tenth for the next couple of years, although Citi noted that the hit to SGX's profits "appears manageable as the impact is spread over the next two financial years".

That being said, investors will question whether other suites within SGX's derivatives portfolio are also vulnerable, Citi said.

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DBS's Lim Rui Wen downgraded the counter to "fully valued" from "hold", and lowered its TP to S$7.40 from S$10 previously. She cut the earnings estimates for FY2021-2022 by 11-19 per cent, but left its FY2020 forecast unchanged.

CGS-CIMB likewise downgraded the stock, to "reduce" from "add", and decreased the TP to S$8 from S$10.50. Analyst Ngoh Yi Sin lowered her estimate by 10 per cent for FY21-22's earnings per share to reflect the direct loss in revenue stream.

RHB stayed "neutral" on the stock because it sees limited downside, and SGX remains in a net cash position with a monopoly over the trading of Singapore-listed equities. However, RHB lowered its TP to S$8.60, from S$9.70 previously, trimming both its FY21 and FY22 net profit forecasts by 11 per cent.

Jefferies Research, which also pared its earnings estimates by 11 per cent for FY21 and FY22, maintained a "hold" call with a reduced TP of S$8.50 compared to S$9.10 previously.

Meanwhile, OCBC Investment Research maintained its "sell" rating and advice to trim positions, while cutting the fair value estimate to S$8 from S$9.30.

The stock's out-performance year to date compared to Singapore banks within the Singapore financials index "looks likely to narrow further" as near-term investor sentiment is expected to stay weak, OCBC added.

Furthermore, the expiry of the MSCI licences will slow down SGX's growth considerably, the research teams highlighted separately.

CGS-CIMB described it as a "big hit" to one of SGX's growth engines, as the derivatives segment had accounted for about 51 per cent of its revenue for the first nine months of FY20.

DBS also said the reduction in the MSCI licence agreements has "derailed SGX's medium-term thesis in the interim", even though the bourse operator has the prerequisites to power growth in the segments of fixed income, currencies and commodities as well as data, connectivity and indices.

At the same time, SGX is set to face heightened competition from the transfer of the licences to the Hong Kong Exchange (HKEX) as well as HKEX's plans to launch more futures contracts, which will in turn have an indirect impact on the Singapore company's income.

However, new contracts on HKEX typically take a few years to gain sufficient liquidity, CGS-CIMB pointed out.

Citi's Robert Kong and Weldon Sng wrote that investors will "keenly" watch SGX's dividend policy, with its multi-asset strategy including bolt-on acquisitions and most recently the taking on of balance sheet debt for the first time, 

"SGX historically has been considered a strong cash flow generator and dividend play," Mr Kong and Mr Sng added.

RHB's Leng Seng Choon said that although SGX's share price could see short-term weakness, it ought to be supported by "respectable" dividend yields.

Mr Leng forecast a FY20 dividend per share of 36 Singapore cents - giving a dividend yield of about 4 per cent - based on an 85 per cent payout ratio. However, it is predicting a lower FY21 dividend of 31 cents per share, given RHB's expectations of an earnings contraction for that year.

Jefferies' Krishna Guha similarly said that further share price weakness will be limited, although admittedly in the near term there will be a share price overhang and lower earnings visibility.

The SGX management's commitment to "sustainable and growing" dividends provides a downside floor, and the exchange will likely work with like-minded partners and index providers to bridge the product gap while retaining the customer base in the interim, Mr Guha wrote.

He added that SGX's investments in the last few years - including Scientific Beta, SGX Bond Pro and Baltic Exchange - should help to develop the competencies to come up with bespoke investment products and mitigate the impact from the reduced partnership with MSCI over time.

Jefferies estimated a fair value of S$8.40 based on the dividend discount model, implying a 4 per cent downside from Wednesday's close.