SGX likely to post moderate H1 FY2022 earnings, dragged by cash equities: UOBKH

THE Singapore Exchange (SGX) S68 is expected to grow year on year in most segments based on strong H1 financial year 2022 volumes, reported UOB Kay Hian (UOBKH) ahead of results announcements from the Singapore Exchange.

However, anticipate overall results to be flattish, due to predicted declines in the cash equities segment, the report released on Tuesday (Jan 18) added.

UOBKH analyst Llelleythan Tan maintains a "hold" call on the investments holding company, but has revised the target price to S$9.74, up S$0.33 from the previous target of S$9.41, which is 23.8 times its estimates for SGX's FY2022 price to earnings ratio.

The brokerage has also revised its FY 2022, 2023 and 2024 earnings predictions down to S$437.8 million, S$468.9 million and S$490.9 million respectively. It also expects FY 2022 earnings to moderate slightly by 1.7 per cent year on year.

Shares of SGX closed at S$9.54, down S$0.09 or 0.9 per cent on Tuesday.

Among the segments, fixed income, currencies and commodities derivatives are "earmarked to be core revenue growth drivers", said Tan. The segment will see an overall 16-18 per cent increase from the year before, as the global economy continues to recover alongside supply chain constraints.

The currencies and commodities derivatives segment is forecasted to increase 18.6 per cent from the year before, following strong volumes in the USD/CNH (US dollar and offshore Chinese yuan) and INR/USD (Indian rupee and US dollar) futures, as well as high growth in forward freight agreements, iron ore and petrochemical derivatives.

Fixed income revenue is also poised to go up S$0.5-1 million year on year, the analyst said, citing the higher amount of funds raised from bond listings.

Data, connectivity and indices will also be reliable sources of revenue, as the acquisition of smart data index firm Scientific Beta in FY2021 resulted in growing demand for index tracking, and environment, social and governance and thematic investing.

Equity derivatives is likely to see growth of 8.4 per cent this year, due to higher average fee per contract assumptions and removing introductory discounts for the FTSE China A50 contracts, despite dips in total contract volumes.

However, the projected growth will be dragged by cash equities, as lower securities were traded daily, bringing the securities daily average traded volume assumption down to S$1.28 billion, compared to S$1.35 billion in the previous year, the analyst noted.

"Based on H1 FY2022 market statistics, we expect the revenue to post a 3- 4 per cent year on year decline, forming 48 per cent of our FY22 forecasts as securities turnover value dropped 7 per cent year on year," he said.

Nonetheless, the overall decline in FY2022 may be stemmed by the new anticipated special purpose acquisition company (SPAC) listings in the second half of the year, depending on their successes, he added.

Stocks are likely to be impacted by record high inflation rates, as 3 interest rate hikes are expected this FY 2022, Tan said.

The hikes, with the first expected in June 2022, would boost SGX's treasury income, although it may also depress trading velocity and revenue from cash equities, he wrote.

Despite the upwards revision of the target price, UOBKH is remaining cautious about the outlook of SGX, due to competition from the Hong Kong Exchange's MSCI A50 index futures offering.

But Tan said that the success of "exciting initiatives" such as over-the-counter forex offerings, government initiatives, depositary receipt linkages and SPACs could "rerate SGX to trade similar to peers".

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