SGX share price: Why did Jefferies upgrade the stock to ‘buy’?

• Singapore Exchange (SGX: S68) share price hits S$10.30 per share
• Jefferies upgraded the counter to ‘buy’ with a S$11.30 price target
• The bourse’s securities turnover in March reached a one-year high
• Its derivatives business also shone with volume gains across asset classes

Why are research teams bullish on SGX?

Jefferies has upgraded the Singapore Exchange (SGX) to ‘buy’, from ‘hold’. Analyst Krishna Guha also increased the price target to S$11.30, from S$10.50.

Guha raised his earnings estimates by 11% for FY2021 and 4% for FY2022, on the back of robust securities volumes and derivatives fees.

CIMB analyst Andrea Choong, meanwhile, expects equity turnover to sustain over FY2021, given the low-rate environment and buoyant financial markets. She gave an ‘add’ recommendation and S$11.61 target.

SGX’s total securities market turnover for March 2021 increased 50% from the previous month to S$38.7 million, the highest since March 2020.

Its derivatives franchise likewise performed strongly on the back of broad-based volume gains. The average fee per contract for equity, currency and commodity derivatives in the January-March period grew by 19% quarter-on-quarter to S$1.38.

‘The strong performance was due to investor optimism, local market outperformance in the region, China’s economic resurgence, and market participants’ hedging needs,’ Guha said.

Earlier this month, DBS Group recommended ‘hold’ on SGX with a price target of S$10.20, following the latter’s partnership with the New Zealand Exchange on dairy derivatives.

What might help SGX grow?

The company has reiterated its focus on seeking mergers and acquisitions (M&A). ‘While these initiatives add completeness to SGX’s multi-asset strategy, a key downside risk would be a non-accretive M&A deal,’ according to CIMB’s Choong.

A potential catalyst for SGX is market volatility, which will spur trading, she added.

Jefferies noted that SGX is expanding its product offerings through organic and inorganic means to grow its revenue and facilitate financial-market development.

However, some of these efforts ‘are admittedly work in progress’, Guha said. For instance, notwithstanding the BidFx acquisition, forex futures volumes are little changed from a year before.

‘But perhaps more importantly, open interest rose from 113,000 contracts to 163,000 contracts in the same period,’ he pointed out.

Similarly, thanks to its expanded partnership with FTSE, SGX has been able to partially mitigate the impact of the MSCI contract termination. The tightening of financial conditions in the region may also mean heightened volatility and hedging needs, Guha added.

SGX share price advances again

Shares of SGX finished Wednesday 1.4% higher at S$10.30 - their strongest close since April 2020 - after already gaining 2% on Tuesday.

Maybank analysts see SGX as one of their top stock picks in Singapore, giving a S$11.48 target price with a ‘buy’ rating.

Jefferies flagged that a key near-term risk for SGX is the potential launch of MSCI China futures by its competitor, the Hong Kong stock exchange.