Expanded Platforms And Offerings Will Attract More Clients In Future

Key Takeaways

• Expansion of SGX's OTC FX platform and modern trading initiatives are set to boost revenue growth and diversify income streams.
  
• Growth in cash equities, IPOs, and derivatives trading is expected to drive increased revenues amid favorable conditions and strategic expansions.
  
• Increasing competition, regulatory scrutiny, and macroeconomic challenges may hinder SGX's growth, impacting its revenue, earnings, and risk management capabilities.

Catalysts

An investment holding, engages in the operation of integrated securities and derivatives exchange, related clearing houses, and an electricity market in Singapore.

• The expansion of SGX's OTC FX platform, with a focus on enhanced functionalities and increased client adoption, is expected to drive revenue growth as it continues to gain traction and contribute a higher percentage to group EBITDA.
  
• Growth in cash equities, driven by strong investor interest in index stocks and REITs due to favorable macroeconomic conditions, suggests continued revenue increases in this segment.
  
• SGX's strategic initiatives to broaden client participation and expand trading during the T+1 session are likely to drive higher volumes and revenues in its derivatives suite, benefiting from global market volatility.
  
• SGX's efforts to modernize trading platforms and increase product offerings, such as new ETFs and derivatives, have the potential to further diversify income streams and drive revenue growth, while maintaining efficient cost control to impact net margins positively.
  
• Anticipated improvements in the IPO pipeline and expanded regional outreach could lead to an increase in listings and securities trading volumes, which would positively affect revenue and overall earnings growth.

Singapore Exchange Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Singapore Exchange's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 49.7% today to 46.3% in 3 years time.
• Analysts expect earnings to reach SGD 727.2 million (and earnings per share of SGD 0.68) by about April 2028, up from SGD 656.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SGD643.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from 22.0x today. This future PE is greater than the current PE for the SG Capital Markets industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Singapore Exchange Future Earnings Per Share Growth

Risks

• The reduction in commitment to clearing funds indicates a potential decrease in risk buffers, which may affect SGX's ability to manage risks effectively, potentially impacting revenue stability and operational margins.
  
• Increasing competition and regulatory scrutiny in global financial markets could become a hurdle for SGX's growth in its derivatives and cash equities segments, potentially affecting future revenue and earnings.
  
• Macro tailwind moderation and geopolitical uncertainties might dampen the recent investor interest in SGX's cash equities and derivatives markets, posing risks to sustained revenue and net margin growth.
  
• High interest rate environments could lead to increased interest expenses and affect SGX's leverage and interest coverage ratios, subsequently impacting net margins and earnings growth.
  
• While there is optimism about the IPO pipeline, macroeconomic factors and competitive pressures from exchanges in Hong Kong and New York could limit new listings, impacting revenues and overall market capitalization growth.

Valuation

• The analysts have a consensus price target of SGD13.147 for Singapore Exchange based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD15.07, and the most bearish reporting a price target of just SGD10.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD1.6 billion, earnings will come to SGD727.2 million, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of SGD13.53, the analyst price target of SGD13.15 is 2.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.