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Thursday, May 28, 2020, 18:25
SGX facing more competition, payout scrutiny after MSCI deals
By Bloomberg
Thursday, May 28, 2020, 18:25 By Bloomberg

This Jan 21, 2015 photo shows people walking at the lobby of Singapore Exchange Ltd (SGX) headquarters in Singapore. (BRYAN VAN DER BEEK / BLOOMBERG)

Singapore Exchange Ltd. (SGX) faces heightened competition, a drop in profits and close monitoring of its dividend policy after MSCI Inc.’s decision to shift index licensing for some derivatives to Hong Kong, analysts said.

MSCI will stop licensing for most derivatives products on SGX’s platform early next year, while separately agreeing to let Hong Kong Exchanges & Clearing Ltd. (HKEX) sell futures and options contracts based on its gauges. The move has renewed concerns about competition for Chinese mainland futures traded in Singapore, after Hong Kong last year announced that it will start offering futures on the MSCI China A Index. Here’s what analysts had to say.

MSCI will stop licensing for most derivatives products on SGX’s platform early next year, while separately agreeing to let HKEX sell futures and options contracts based on its gauges

Investor questions

“Investors will question whether other suites within the derivatives portfolio are also vulnerable,” Citigroup Inc. analyst Robert Kong wrote in a note on Wednesday. However, the date of the MSCI China A Future launch by HKEX is uncertain and regulatory push back “seems high,” he said.

“With SGX’s multi-asset strategy including bolt-on acquisitions and most recently taking on off balance sheet debt for the first time, the SGX dividend policy going forward will be keenly watched,” he added, noting management’s forecast of a net income impact of 10 percent-15 percent in FY21 from the MSCI decision was “conservative”.

ALSO READ: SGX plunges most in 17 years as MSCI signs pact with Hong Kong

Commitment to dividends

“With MSCI announcing its partnership with HKEX, it may raise the odds of a competing product to China A50 futures coming up” in Hong Kong, Jefferies Inc. analyst Krishna Guha wrote in a report on Wednesday. Jefferies has lowered SGX’s earnings estimates for the year ending June 2022 by 11 percent on a reduction in derivative volumes.

The expiry of all non-Singapore MSCI products next February “dents the medium-term thesis for SGX’s derivatives volume growth” as they contribute 15% of equity derivative contract volumes, DBS Bank Ltd. analyst Rui Wen Lim wrote in a note

Further share price weakness is likely limited by the firm’s commitment to a dividend, Guha said. The brokerage estimates a fair value of S$8.40 based on the dividend discount model, implying a 4 percent downside from Wednesday’s close.

Dents medium-term thesis

The expiry of all non-Singapore MSCI products next February “dents the medium-term thesis for SGX’s derivatives volume growth” as they contribute 15 percent of equity derivative contract volumes, DBS Bank Ltd. analyst Rui Wen Lim wrote in a note on Wednesday. HKEX’s plan or China futures contracts “may compete with SGX’s FTSE China A50 Index Futures, which accounts for about 40% of SGX’s total derivatives volume,” she said.

“We believe that FY22F is likely to be worst hit,” Lim wrote. DBS downgraded the stock to fully valued from hold and slashed the 12-month target price to S$7.4 from S$10.

READ MORE: Singapore's key prices fall for first time in a decade


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