Can SGX Limited Continue its Double-Digit Expansion?

By ShareInvestor – 13 February 2020

  • Natural Monopoly as the sole stock exchange in Singapore
  • Strong Growth in SGX's Fixed Income, Currencies and Commodities segment
  • 8-years Growth Track Record
  • Consistent dividend payouts with ample room for growth
  • Growth opportunities from new asset classes and M&A activities

Singapore Exchange Ltd (SGX: S68) or “SGX” for short, is Singapore's sole stock exchange. The bourse offers a platform for the trading, buying and selling of securities such as equities, fixed income, currencies and derivatives.

The group also offers listing, clearing and settlement services for listed companies. Over the past decades, SGX has morphed from a purely equities stock exchange into a successful multi-asset exchange with a focus in its derivatives division.

Given the recent heightened volatility in the stock markets due to the USA-China Trade War and Wuhan virus, SGX seems to be moving in the right direction to provide more new portfolio solutions for hedging purposes.

Sourced from WebPro

SGX's share price has risen around 20% from $7.17 on 1st Jan 2019 to around $9.15 at the time of writing.

Wondered what's driving this strong growth and can the share price continue its ascent?

We delve deeper into the company to find out.

Financials

The group has displayed impressive growth in its recent earnings reports.

Sourced from WebPro

For its trailing 12M Dec 2019, SGX clocked up its highest revenue since its IPO back in 2000 at S$955.29 million, up 10% on a year-to-year basis. Net profits also increased 12.1% higher to S$416.76 million during the same period.

Zooming in on the latest 2Q FY2020, SGX recorded a revenue of S$231 million and net profits of S$99 million, both up 3% compared to the previous year. The increase can be attributed to the strong 20% jump in Fixed Income, Currencies and Commodities segment, mitigated by the single-digit declines in Equities and Data Connectivity segments.

Free Cash Flow History

Sourced from WebPro

SGX has a strong record of free cash flow generation, as can be seen from the 8-year track record displayed above. Every single year saw healthy free cash flow generation, and this has led to SGX being able to pay out regular and increasing dividends over the years.

Its free cash flow has also been increasing steadily since the bottom low in FY2014, which enables SGX to build up a strong war chest for merger and acquisition (M&A) opportunities.

Dividends Analysis

Sourced from WebPro

SGX has paid out healthy dividends over the years, in line with the increase in free cash flow. Its dividend payout ratio has also hovered around 77% to 90% over the last few fiscal years.

FY2019’s dividends per share came in at 30 Singapore cents, which translates to around 3.26% dividend yield based on a share price of S$9.19.

Competitor Analysis

Sourced from WebPro

A comparison of SGX against its closest competitors Bursa Malaysia Berhad (KLSE: 1818), Hong Kong Exchanges and Clearing Limited (HKSE: 0388) and NASDAQ Inc (NASDAQ: NDAQ) shows that SGX has the strongest revenue growth at 10%.

SGX commands the highest return on assets (22.5%) and return on equity (38.7%) among its peers as well. Last but not least, it also has a remarkable net profit margin of 43.6%, second only to the HKEX.

Analyst Consensus Estimates

Sourced from WebPro

The average analyst target price for SGX has been on the rise over the last 6 months since Aug 2019 (depicted by the brown line). This signals confidence in SGX's continued top and bottom-line growth.

However, the number of "sell" calls (red colour bars) has also increased in recent months as the share price headed north. Thus, this means that the share price might have run up too quickly and has surpassed the analyst estimates for now.

SGX Growth Plans

The group has plans to continue to grow its derivatives suite of products to cater to both institutional and individual investors.

According to its press release, CEO Loh Boon Chye talked about plans to brand itself as a "one-stop-shop" and has successfully positioned itself as a multi-asset exchange.

He added, “To capture the rapidly growing opportunities in factor-investing strategies, we are acquiring an independent index provider Scientific Beta, whose research-driven business would complement our existing technology-driven index business, SGX Index Edge”.

Recently, in October 2019, SGX has also set up its inaugural S$1.5 billion multi-currency debt programme in order to provide the group with ample debt headroom for M&A.

Conclusion

SGX is on a strong growth trajectory that should not be disrupted anytime soon, as management has positioned the bourse as a strong location for multi-asset solutions for portfolio hedging and management.

While SGX owns the natural monopoly for being the sole exchange of Singapore, SGX has to contend with poor trading volumes and stiff competition securing IPOs from the other global exchanges.

That said, SGX has also carved out a key niche to attract global REITs/Trusts to list in Singapore. Coupled with the introduction of more derivative products like DLCs and Index businesses, SGX has a good chance to enjoy continued growth and pay out steady dividends over the long run.

Check out ShareInvestor’s webpro to access timely updates to empower your investment research - http://www.shareinvestor.com/sg

Happy investing!

 

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