Maybank IB on Singapore Exchange noted that the multi-asset strategy working for SGX with yields at a ceiling. The house recommends a HOLD on SGX as the FY23 core earnings were ahead of MIBG/Street expectations. Its diversification away from cash equities towards a multi-asset strategy is delivering defensive earnings. The Group is undertaking several initiatives to broaden its product offering and leverage its trading venue. However, this is coming at the expense of medium-term dividend growth. Against this backdrop, Maybank IB thinks SGX’s risk-reward is balanced and downgrades to HOLD with a lower TP of SGD10.24.
Derivatives delivering defensiveness
FICC segment saw a 33% YoY jump in 2HFY23 revenues, while equity derivatives increased +14% YoY. Combined, these segments contributed 59% of total FY23 revenues. The Group’s pivot to a multi-asset risk management venue is delivering a defensiveness to earnings that was lacking when cash equities drove revenues. Contribution from this has fallen from 37% in FY19 to 29% now. However, the house notes that 96% of the 2HFY23 YoY derivative revenue delta was from treasury income reflecting aggressive interest rate hikes during the period. With the outlook for further rate hikes diminished a similar trajectory is unlikely, in our view.
Promising medium term initiatives, but…
Weak market conditions saw FY23 cash equities’ average daily trade value (ADV) fall 15% to SGD1.1bn. Maybank IB generously forecasts similar ADV levels for FY24E. Despite a weak IPO environment in FY23 (IPOs -53% YoY), Management claims the pipeline is healthy. It expects some improvements to IPOs in FY24E (+33% YoY). Initiatives such as Thai SDRs should provide medium term pathways to broaden the equity product offering. Similarly, the GIFT connect with India should give access to opportunities for more products beyond the current Nifty contract. SGX’s forays in sustainability derivatives could also give it access to new opportunities.
…at the expense of dividends now. Downgrade to HOLD
Management is guiding for a mid-single-digit dividend growth rate over the medium term. If 5% YoY is assumed, this is a 3.9% average dividend yield for FY24-27E. Compare this to the STI’s 5.2%. Management’s focus on medium-term capital deployment could result in higher dividends in the future, but near-term risk-return visibility is balanced. Post results, Maybank IB lowered FY24-25E earnings by 2-3%.
