UOB Kay Hian lowers SGX's TP to $9.41 on medium- to long-term uncertainty for FTSE China A50 Index futures

As at 1.11pm, shares in SGX are trading 3 cents lower or 0.32% down at $9.26.

UOB Kay Hian analyst Llelleythan Tan has maintained his “hold” recommendation on Singapore Exchange (SGX) as it registered softer trading velocity in the month of October.

In October, SGX logged a total securities turnover value of $24.3 billion, 4.8% higher y-o-y, and 10% lower m-o-m.

Securities daily average value (SDAV) came in 9.7% higher y-o-y and 5.8% lower m-o-m at $1.16 billion.

The lower m-o-m declines were due to 19% lower total turnover value for financial stocks on a m-o-m basis.

Despite the lower figures, securities trading volumes remained above pre-Covid-19 levels.

SGX’s total derivatives trading volume in October fell 14.2% m-o-m mainly due to muted activity from China’s Golden Week holidays from Oct 1 to 7.

Meanwhile, derivatives daily average volume (DDAV) was up 14.2% y-o-y, reflecting an overall growing demand for risk management products.

In his report on Nov 25, Tan has lowered his target price to $9.41 from $11.65 previously.

“Currently trading at 22.6 times FY2022, we have now pegged our price-to-earnings (P/E) multiple to 23.8 times (29.0 times peers’ average) FY2022 earnings, +1 standard deviation of SGX’s historical forward P/E,” he writes.

The lowered multiple was made to adjust for the medium- to long-term uncertainty in SGX’s FTSE China A50 futures.

On August 20, the Hong Kong Exchanges and Clearing (HKEX) announced that it would be launching its MSCI China A50 Connect Index Futures, providing direct competition to SGX’s FTSE China A50 Index Futures.

See: Analysts trim target price for SGX following HKEX announcement on new China A-share index futures contract

At the time, analysts from PhillipCapital, OCBC Investment Research (OIR) and UOB Kay Hian trimmed their target prices to account for the negative impact anticipated.

The MSCI China A50 Connect Index Futures by HKEX, which is similar to SGX’s FTSE China A50 Index Futures, was launched on Oct 18.

Trading for HKEX’s MSCI A50 futures has begun and has seen a strong ramp up in contract volumes and open interest, notes Tan.

“Given expected strong competition from HKEX’s MSCI A50 index futures offering, we remain cautious on the impact of competition on SGX’s future earnings. However, we think that success of new exciting initiatives (OTC Forex offerings, government initiatives, depositary receipt linkages, SPACS) could re-rate SGX to trade similar to peers (29.0 times),” says Tan.

To this end, Tan has also lowered his net profit estimates for FY2022 to FY2024 to $423 million (from $429 million), $432 million (from $449 million) and $439 million (from $469 million) respectively.

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He has also reduced his FY2022 to FY2024 FTSE A50 volume assumptions to 91 million, 86 million and 77 million, from 98 million, 106 million and 110 million respectively.

As at 1.11pm, shares in SGX are trading 3 cents lower or 0.32% down at $9.26, or an FY2022 P/B of 6.8 times and dividend yield of 3.4%.

Photo: Bloomberg

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