Brokers' take: UOBKH initiates coverage on SGX with S$12.35 target price

UOB Kay Hian (UOBKH) has started coverage on the Singapore Exchange (SGX) with a "buy" recommendation and a target price of S$12.35.

In a report on Tuesday, the research house said that SGX's strength lies in its multi-asset marketplace with a range of liquid products in key asset classes. SGX is also able to secure customer retention through its high-volume market share in key products such as the FTSE Taiwan Index, UOBKH said.

However, analyst Lucas Teng highlighted that volatility remains, with turnover velocity remaining elevated from the effects of Covid-19. Geopolitical risks and a low interest rate environment are also factors which will likely keep the daily average traded value (DAV) elevated, he noted.

In addition, Mr Teng said that changes to the Morgan Stanley Capital International (MSCI) could boost volumes in MSCI Singapore Index derivatives, given the hedging required. With Singapore-based secondary listings of foreign-listed entities such as Grab or Sea Ltd, an added bonus could surface, he added.

Mr Teng also noted that the group is benefiting from structural tailwinds such as the electronification of over-the-counter (OTC) derivatives, and passive investing.

In the scenario where both Grab and Sea Ltd have a secondary listing on the SGX, the research house expects that this could increase cash equities DAV by 6-40 per cent, assuming that there is no leakage in trading volume from other large caps.

Mr Teng forecasts revenue and earnings to have a five-year compound annual growth rate (CAGR) of 3.9 per cent for FY19-23, and cites the group's Data, Connectivity and Indices (DCI) segment, given the acquisition of Scientific Bet and the growth of factor-based investing to be SGX's growth engines.

"As such, the segment could see a five-year CAGR of 9.4% for FY19-23. We believe that currency derivatives will remain strong, given the group's large market share in USD and yuan and the shift from OTC foreign exchange options trading to listed exchanges," he said.

Mr Teng noted that risks include competition risk, credit risk from defaults, liquidity risk, technological risks relating to service disruption including cyber attacks and regulatory risk.

UOBKH said that the target price of S$12.35 with a 17 per cent upside is pegged to peers' average of 28 times FY22 earnings, and 28.5 times FY21 earnings. The counter also has good cash-generating abilities, and is trading at 17 times its price to operating cash flow, which is one standard deviation below its long-term mean multiple of 20.2 times.

In addition, UOBKH highlighted that SGX has a net cash position of about S$450 million, and is well-positioned for expansion through further mergers and acquisitions.

New initiatives such as secondary listings and special purpose acquisition companies could potentially rerate SGX to trade close towards its developed markets' counterparts of similar size, like the Japan Exchange Group, the research house said.

Share price catalysts for SGX are secondary listings of foreign-listed entities, longer-than-expected period of trading volatility, as well as mergers and acquisitions, Mr Teng said.

As at the midday break on Tuesday, SGX shares were trading at S$10.57, down S$0.01 or 0.1 per cent.