Broker's Take: CIMB upgrades SGX as "leaner, meaner" exchange may seek M&As

CIMB Research has upgraded the Singapore Exchange (SGX) to an "add" rating with a higher target price of S$8.09, on hopes that cost-cutting measures and ammunition for acquisitions could take the exchange ahead.

"Leaner, meaner machine. The most tangible changes implemented by the CEO were cost efficiency measures. A group restructuring, paced out hiring, cutback on discretionary spending and better external vendor management led to impressive cost reduction despite ongoing investments in technology," the brokerage said.

It said that with a war chest of S$395 million and room to gear up or raise funds, SGX could look for large mergers and acquisitions in areas such as fixed income, foreign exchange, market data and indices.

CIMB said acquisitions in market data and indices would offer more meaningful earnings uplift and diversification. "Among the leading index businesses, only the MSCI is not currently owned by an exchange or recently acquired," CIMB said.

"While derivatives contracts such as the China A50 and iron ore futures have seen strong trading volumes, it has also built concentration risk with derivatives accounting for 40 per cent of revenue in fiscal 2016. A focus on growing market data revenue streams will help to ease some of this risk."

CIMB added that the move to have the minimum allocation of IPO offer size to retail investors at the lower of either 5 per cent of the offer, or S$50 million, will address retail investors' grouses.

"SGX is also considering allowing for dual class shares, which could attract listings from technology firms that would otherwise have gone to competing exchanges."