Singapore Exchange Limited, incorporated in August 1999 in Singapore, operates as a securities and derivatives market infrastructure company with principal activities pertaining to investment holding, treasury management, provision of management and administrative services to related corporations and provision of market data and technology connectivity services.

The revenue portfolio is segregated across the following segments - Equities-Derivatives, contributing 27% of the FY24 sales; Equities – Cash, 27%, Platform and Others, 20%; and Fixed Income, Currencies and Commodities, 26%.

Growing strategic significance

On the commodities side, the next phase of growth is expected to be anchored on synergies between the ferrous and freight offerings. SGX FX has also gained strategic importance in recent years, demonstrated by 36% YoY growth in average daily FX Futures volume to 204k in FY24.

Moreover, as the company expands its client base in Europe and Asia Pacific, OTC FX is projected to contribute a mid-to-high single-digit percent of group EBITDA in the medium term. On the equities business end, the company expects to enhance their range of depository receipts and introduce exchange-traded funds via the Singapore-China ETF product link. Singapore Exchange also looks to collaborate with channel partners to support increased regional retail participation in the market.

Consequently, the group plans to enhance revenue between 6-8% CAGR in the medium term. Further, the company plans to work with the broader ecosystem, as the operator of the national market infrastructure for securities in Singapore to create initiatives - market development and regulatory measures, which will structurally improve the vibrancy of the stock market. With continued investments in the modernization of the exchange trading and clearing platforms, the company anticipates an increase in expenses and capital expenditure.

As a result, Singapore Exchange expects an increase of 2-4% in expenses in FY25, and in the low to-mid single-digit % range in the medium term; capex is projected in the range of SGD70-75mn and anticipated to further increase in the medium term owing to the group’s focus in technology modernization.

Steady improvement in operational performance

Revenue witnessed an upward trajectory during the FY15-24 period, demonstrating a CAGR of 5.2% to reach SGD1.2bn. EBITDA margins on the other hand have been consistently trending upwards above 50% during the period, with 51.5% reported in FY24. However, margins contracted overall by 220 bps to reach 51.5%.

Notwithstanding the margin contraction, EBITDA increased at a CAGR of 4.8% over the same period to reach SGD635mn in FY24. The cash position has been volatile during the same time owing to cash outflow from financing and investing in certain periods, driven by loan repayments, buyback programs and capex.

In comparison, its regional peer, Hong Kong Exchanges, demonstrated superior performance, clocking a revenue CAGR of 8.4% over the past nine years to reach HKD20.4bn in FY23. EBITDA performance also followed similar trajectory, growing at a CAGR of 8.8% to HKD14.1bn, supported by a notable rise of 221 bps in margins over the same period to reach 69.1% in FY23.

The management strives to pay out a healthy dividend to its shareholders and targets dividend per share at a mid-single digit % CAGR in the medium term. Accordingly, the company has declared a final dividend of SGD0.09 per share, bringing the total dividend payout to SGD0.345 per share in FY24, reflecting a yield of 3.64%.

Valuation favourable compared to peers

Singapore Exchange’s P/E currently stands at 22.2x, based on the estimated FY25 EPS of SGD0.55, comparatively lower than the global peer average of 41.5x, but trending slightly higher than the historical 10-year average of 21.7x. EV/EBIT valuation approach also demonstrates a lower multiple of 17x for the company, compared to the global peer average of 20.3x. The company is also trading relatively cheaper than its regional peer, Hong Kong Exchanges, which is trading at a P/E of 29.9x and EV/EBIT multiple of 24.4x.

Tracking positive fundamentals, the stock price surged over 28% in the past one year. Out of the 14 analysts covering the company, 1 has a 'Buy' rating, 4 gave an ‘Outperform’ recommendation, and 6 gave a 'Hold' rating for an average target price of SGD12.2, indicating a potential decline of 0.9% from the current levels. The recent rally in prices means that the target has already been reached, however, any correction in prices could provide a decent opportunity for investors to evaluate the company. Optimism amongst analysts is further corroborated by the expected revenue CAGR of 5% over the period FY25-27 to reach SGD1,465mn.

Overall, the company looks poised to add to its growing significance in Asia backed by a well-structured multi-asset strategy, impressive rise in daily volumes and sustained growth in commodities. However, with significant reliance on technology, any disruptions that could be caused especially via cyber security breaches could be costly for SGX and thereby could also have an impact on the overall top-line performance. Regulation is also an important aspect which can impact the day-to-day operations of the company. Hence, complying with vital regulations becomes a key to managing the operations seamlessly.