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Promising Outlook For SGX Despite Economic Uncertainties
Corporate Digest | 23 September 2011
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By: Xavier Lim
Articles (51) Profile
By: Simeon Ang
Articles (125) Profile

By Xavier Lim

Double-dip recession, the big “R” was the talk these days. Renewed concerns over the ongoing European debt crisis and the possible recession in the US have led to the plummet of global stock markets recently.

With little spared in this global panicky sell-off, Singapore Exchange Limited (SGX) dived almost 10%, based on 21 September 2011 closing price of $6.79, since the beginning of August. In addition, SGX’s lower FY11 earnings as compared to previous financial year further weighed on the decline of its share price. Several analysts have also rated ‘Neutral’ on SGX, citing weaker trading volume going forward.

While all these news seem unfavorable to SGX, its August trading activity results released on 2 September recorded strong volume growth in both securities and derivatives trading amidst the heavy selling across the region over the past few weeks. SGX reported that the securities turnover spiked 31% year-on-year to $41.4 billion in August with securities daily average value of $1.97 billion. Additionally, the derivatives daily average volume recorded 360,282 contracts, bringing the total volume for August to record to 8.1 million contracts, a surged of 53% year-on-year.

Source: SGX FY11 Financial Report

Notably, the Chicago Board Options Exchange’s Volatility Index, the so-called fear gauge more than doubled within 6 days, from 22.63 to 48 before settling down to close at 31.62 in the month of August.

Indeed, the dramatic spikes in volatility due to the lack of investors’ confidence in policy makers to solve global economic problems have created trading volume. This benefits stock exchanges as they depend heavily on trading volume to make money. While volatility is expected to persist in the short-term, many analysts (including this writer) expect the sharp twists and turns in the stock and bond markets to lead to a reduction in trading volume as investors get increasing sidelined by the looming global economic slowdown in the later part of this year.

Focus On Fundamentals!
That does not mean that SGX outlook is gloomy. In fact, the continuing roll out of a slew of revenue-enhancing initiatives by SGX are steps in the right directions. The start of all-day trading from 1 August 2011 as well as the launch of the REACH trading engine have opened up more and faster ways of order execution for investors and brokers and hence, better revenue growth forward. In addition, the expansion of its Asian Gateway offering with acquisition of new members will also boost its top and bottom lines. As at FY11, SGX has acquired 24 new members, bringing its total to 132 members. Investors may want to take note that the 9 new members acquired in FY10 added 3% to securities value traded and 2% to derivatives trading in FY11. Besides, SGX, leveraging on its Asian Gateway status, is pursuing international brand names to list on its bourse (refer to insert article below). All these earnings drivers will in turn push up its share price when results get increasingly tangible.

On the other hand, the technical picture is less rosy for SGX. SGX rebounded off from its 52-week low of $6.56, but it did not managed to stay above its immediate resistance of $7.10. This suggests that the overall momentum remains weak. In addition, with the share still in the descending trend channel, SGX is likely to continue to trade lower. Immediate support line is tipped at $6.40.

In this volatile market, investors are encouraged to use dividends as a hedge against fall in share value. As SGX is committed to a base dividend of $0.16 per year and assuming continuation of its historical 90% dividend payout ratio and its strong cash hoard (excluding restricted reserves) of $544.8m as at 30 June 2011, investors could reap a rich dividend yield of 3.8% and 4.2% at $7.10 and $6.40 respectively.

Source: SGX FY11 Financial Report

SGX’s IPO Market

By Simeon Ang

Ever since the global economy begun its drawn out recovery, global investors seeking to capitalise on emerging markets have been fueling stock market rallies and new listings worldwide. The Great Recession of 2008-2009 had also created a growing initial public offering (IPO) pipeline as companies that previously put off IPO proposals are now looking to raise capital. Even so, the upward growth of global IPO markets in 2011 may not necessarily be smooth as global macroeconomic factors such as the sovereign debt crisis and double-dip recessionary concerns continue to cause headwinds in the global capital markets.

Source: Ernst & Young

As Asia’s gateway, the SGX is the market of choice for investors wanting to participate in Asia’s vibrant and rapidly growing economies. It is in this respect that Asian issuers turn to SGX to seek international capital. In the first half of 2011, the SGX has been ranked 6th globally in IPO funds raised, up from 16th in 2010.

Bending Over Backwards For Big Players?
To be sure, big IPO contracts represent a gargantuan opportunity for SGX in terms of the potential revenue streams it might create. Recently, however, SGX has come under fire by some industry players, which attribute the decline in smaller IPOs this year to the perceived focus by SGX on larger IPOs following the spate of accounting scandals involving Chinese SMEs. The proposed market capitalisation threshold of $150 million for mainboard listings, though not officially implemented yet, is believed to be used as an internal guideline when SGX approves IPO applications, some market players said.

Opportunities Arise In IPOs
Aside from the revenues that are earned from the IPO itself, an IPO, especially one of a high profile entity, could also contribute to average daily trading volumes. According to Ernst & Young, global IPOs in 2010 constituted 31% of total capital market activities. Asian issuers continued to lead IPO activity, capturing 65% of global proceeds in 2010.

Southeast Asian issuers had a particularly bright year in 2010, raising the most capital ever with the SGX at a total of $14 billion in FY11. Hutchison Port Trust’s (HPT) which listed on the SGX this year, was mainly due to the fact that Hong Kong regulations do not yet allow for such business trusts listing. It is currently the single largest SGX IPO, having raised US$5.54 billion.

Source: SGX FY11 Financial Report

Three other large listings on the cards include the US$1 billion Manchester United issue being the most talked about IPO since HPT. In statements released by the football club, the decision to list on the SGX came primarily from the intention to draw on its Asian fanbase. Fitness First, a UK-based gym operator is also in talks to announce an IPO worth approximately US$480 million.

Elsewhere, Switzerland’s Lonza Group, which has a market capitalisation of approximately $4 billion, is seeking a secondary listing on the SGX. Lonza’s chief executive officer had said that the strategic move to list in Singapore enables it to have a more visible presence in Asia. It also intends to tap on the strong capital flow in Asia and enlarge as well as broaden its current investor base in the region. With a strong IPO pipeline, 2011 looks set to be bumper year for the stock exchange.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Singapore Exchange  8.180 -0.07 -0.85%   
Business: [FY18 Turnover] Equities & fixed income (48.2%), derivatives (40.2%), mkt data & connectivity (11.6%).

Insight: Jan-19, 1H19 operating revenue increased 5.7% to $... Read More

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