Brokers' take: SGX extends slide on weak earnings; downgraded to 'hold', 'neutral'

FOLLOWING the Singapore Exchange's (SGX) S68 weaker-than-expected first-half financial results on Thursday, at least four research houses have downgraded their recommendations from "buy" to "hold" and "neutral", citing higher cost projections for the bourse in the coming months.

Research teams from UOB Kay Hian, Maybank Kim Eng (Maybank KE) and Jefferies shifted their recommendations to "hold" and also reduced their target prices on the stock. For UOB Kay Hian, this was slashed from S$12.35 to S$11.65. Maybank KE cut its target price from S$11.48 to S$11.33, while Jefferies cut its target price by S$0.10 to S$11.20.

Meanwhile, analysts from RHB downgraded their recommendation from "buy" to "neutral", but also slashed their target price to S$11.10 from S$12.30.

SGX's share price continued sliding on Friday, hitting a low of S$10.94 at 10.06am, translating to a 9.2 per cent or S$1.11 fall from S$12.05 at Wednesday's close.

The revised target prices by the research houses reflect a range of 0.6 to 5.6 per cent upside on SGX's price of S$11.03 as at 1.03pm on Friday.

UOB Kay Hian and RHB observed that SGX's net profit decline was impacted by lower treasury income that resulted in an almost 20 per cent year-on-year drop in its equities derivatives segment. The announcement of a new scrip dividend scheme was also viewed as "disappointing".

Meanwhile, the analysts also noted that higher staff costs arising from acquisitions such as that of forex trading platform MaxxTrader led to SGX guiding for an 8 to 9 per cent increase in operating expenses in the next financial year. The completion of the MaxxTrader acquisition will add a further S$25 million to SGX's expenses for FY2022 on an annualised basis, UOB Kay Hian said.

Maybank KE acknowledges that SGX has shown a strong performance in the past 12 months, but like its counterparts, is advising to wait for new business growth catalysts to resume - even going as far as to recommend switching to buying DBS stock for "improving operational delivery and upside risks from write-backs".

It also credits SGX's competitive advantage over regional exchanges, thanks to its deep liquidity pools and sizeable market share in key risk management derivative products, noting that a sooner-than-expected Covid-19 macro recovery may drive higher market volumes and liquidity.

Jefferies notes that credit ratings agency Moody's has given SGX an Aa2, the highest given by the agency to any exchange, adding that it is a fan of the investments the bourse has made to diversify its revenue sources, its poor earnings notwithstanding.

"We agree that a continued low-rate environment will attract investors to SGX's multi-asset offering," Jefferies said. "However... we think the counter is fairly valued. Further, initiation of a scrip scheme for the FY2022 dividend will weigh on sentiment, notwithstanding the fact that the capital cushion will be handy for defensive and offensive purposes."

Shares of SGX were trading at S$10.99 as at 2pm on Friday, down S$0.34 or 3 per cent.

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