SGX's non-equities revenue growth boosted by recent acquisitions

SINGAPORE Exchange's (SGX) non-equities business segments have seen their revenue grow strongly in the latest financial year, with contributions from recently acquired subsidiaries providing a boost, even as equities revenue decline.

The fixed income, currencies and commodities (FICC) and data, connectivity and indices (DCI) segments now account for 34 per cent of SGX's total revenue in FY2021, up from around 28 per cent the year before, and SGX continues to see growth opportunities in these areas.

SGX reported on Thursday a 20.5 per cent decline in H2 net profit as operating revenue fell 6.8 per cent, but the company noted that full-year revenue of S$1.06 billion had matched its record revenue from FY2020.

The company's shares fell following the results, and SGX closed at S$11.33 on Thursday, down 6 per cent.

Underlying business revenue for the full year was up 7 per cent, excluding the decline in treasury income, amid a low interest rate environment, SGX said.

SGX chief executive Loh Boon Chye said: "We achieved a strong performance as we invested in growing our business, delivering similar record revenues compared to last year amid a challenging environment."

He added: "Notwithstanding the lower treasury income, our core business segments remained robust, with our fast-growing subsidiaries, Scientific Beta and BidFX, providing an added boost. While the low interest rate environment will continue to impact our treasury income, we believe it will also spur demand for our multi-asset offerings as investors seek enhanced returns."

Net profit for the six months ended June 30, 2021 fell to S$205.6 million, or 19.2 Singapore cents on a per-share basis, down from S$258.6 million or 24.2 cents per share in the prior-year period.

The group's H2 operating revenue fell to S$535.1 million from S$574.2 million, with the decline coming from its equities segment, amid a fall in treasury and other revenue, as well as trading and clearing revenue.

Phillip Securities analyst Terence Chua said that the earnings on Thursday were a little bit of a surprise, as expectations had been higher.

SGX's full year net profit of S$445.4 million missed the average earnings estimate of S$473.5 million, based on a Bloomberg poll of 13 analysts.

DBS Group Research analyst Lim Rui Wen believes the share price movements come as investors take profit on a strong rally in recent months, as profits were below market expectations due to lower revenue and higher expenses.

For the full year, SGX's largest business segment, equities, saw operating revenue decline 7.7 per cent to S$701.1 million.

Equities derivatives revenue declined 20 per cent to S$288.4 million, amid a fall in trading and clearing revenue, mainly due to introductory fees from the new FTSE Asia expansion suite, SGX said. Treasury and other revenue slid 48 per cent to S$57.5 million, mainly from lower treasury income, which fell due to lower yield.

Meanwhile, equities cash revenue rose 3 per cent to S$412.7 million.

FICC revenue rose 23.5 per cent during the year to S$211.8 million, accounting for a fifth of the group's revenue. Excluding BidFX, a subsidiary acquired in July last year, FICC revenue would be comparable to the prior year, at S$172.1 million.

The DCI segment also saw revenue rise 17.7 per cent to S$143.1 million, making up 14 per cent of the group's total revenue. Excluding contributions from Scientific Beta, DCI revenue would have been S$108.2 million, similar to FY2020.

Scientific Beta and BidFX contributed 7 per cent to the group's total revenues in FY2021. Last month, the company also announced the acquisition of FX (foreign exchange) trading platform MaxxTrader. Together with this, SGX said revenue contribution from recently acquired subsidiaries would exceed 9 per cent.

DBS' Ms Lim said the acquisitions will enable SGX to grow and scale its FICC business as it targets to be Asia's largest integrated FX platform, which will provide more stable contributions to its revenue base, compared to equities cash and derivatives.

Over the medium term, Mr Loh noted that the core underlying business is strong. "We will continue to grow that with strong discipline on cost management."

In the FX market, he noted SGX is putting together two over-the-counter, or OTC, platforms that will combine clientele on the buy and sell side, with pricing and risk management solutions for participants. He said: "We see good momentum in that and if we put the platforms together with a broader client base, our outreach will be growing."

Mr Loh noted that Scientific Beta has a strong core offering of smart-factor strategies, and the addition of climate solutions would be an extra pillar that asset owners would look at. Scientific Beta's assets under replication exceeded US$60 billion as at June 2021; he noted that this is "pretty sticky" over the medium term, which can also allow revenue to continue to grow.

Total expenses for FY2022 are expected to rise from S$525 million in FY2021, to between S$565 million and S$575 million, with higher expenses coming from near-term investments in Scientific Beta, BidFX and other growth initiatives, but the expenses growth is expected to moderate in the medium term.

A final quarterly dividend of eight Singapore cents per share was proposed, similar to the year earlier. If approved, it brings total dividends in FY2021 to 32 cents, up from 30.5 cents per share last year.

SGX will be putting in place a scrip dividend scheme to give shareholders the option to reinvest their cash dividends in SGX shares, but it is not intended for the final dividend of FY2021.

During the earnings call, analysts questioned the scrip dividend and whether SGX would commit to zero discount.

Chief financial officer Ng Yao Loong emphasised that the intent is not to shore up SGX's financial resources to meet any near-term liquidity requirements.

"What we are providing is an option for investors to participate in a very cost effective way to reinvest and grow together with us," he said, adding that a discount, if any, would not be at the higher end.

He noted that the company's interest coverage ratio has been very healthy and it has strong cash reserves. SGX also announced on Thursday that it has obtained an Aa2 rating from Moody's - the highest credit rating assigned to any exchange group by Moody's - with SGX's high profitability and low financial leverage among factors contributing to the score.

READ MORE: SGX shares drop over 5%; H2 net profit falls 20.5% on lower revenue