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Foolish Face-off: Singapore Exchange vs. London Stock Exchange

DuelIn our Foolish Face-offs, we aim to bring you a series of articles that pits Singapore-listed companies against their foreign counterparts in a friendly bout. We had earlier looked at how Thai Beverage fared against SABMiller and discovered who won between Singapore Press Holdings and Pearson.

Today, we’ll be looking at two companies that have essential roles to play in their respective country’s stock markets: Singapore Exchange (SGX: S68) and London Stock Exchange (LSE: LSE).

Introduction

The Singapore Exchange was formed on Dec 1999 as a combination of former exchange companies; Stock Exchange of Singapore, Singapore International Monetary Exchange and Securities Clearing and Computer Services.

The company operates the Mainboard (also known as the SGX) as well as the Catalist Exchange in Singapore. Singapore Exchange’s Securities and Derivatives business segments make up 64% of last year’s revenue. In addition, Singapore Exchange has revenue streams coming from provision of market data, depository services, and Initial-Public-Offerings on its two stock exchanges, among others.

The London Stock Exchange operates stock exchanges in two different countries; the London Stock Exchange in the United Kingdom; and Borsa Italiana in Italy. The company also owns the index provider, FTSE. The Straits Times Index (SGX: ^STI) would be a familiar market index for anyone who follows the Singapore financial markets and interestingly, FTSE has a hand in it.

SGX, Singapore Press Holdings (SGX: T39) and FTSE have been cooperating to create and maintain a whole list of indices that are related to Singapore’s stock market, including the STI and FTSE All Share Index (SGX: FSTAS). The former index consists of 30 of the SGX Mainboard-listed stocks with the highest market capitalisations. The latter is made up of the top 98% of all companies based on their market value within the SGX Mainboard.

  SGX LSE
Market Cap S$8.2b £3.4b
Last 12 month Sales S$643.7m £852m
*LSE’s market cap and sales would be roughly equal to S$6.43b and S$1.61b at an exchange rate of £1-to-S$1.89

  Round 1: Valuation

The first round of the Foolish Face-off sees us comparing the valuations of the two companies using Price-to-Earnings (PE), Price-to-Sales (PS) and Dividend Yield.

  SGX LSE
PE 28.3 12.7
PS 12.7 4.0
Dividend Yield 3.6% 2.5%
Share Price S$7.67 1238 pence

SGX clearly trades at a higher premium than LSE based on PE and PS, but fares better on the income-front with a higher dividend yield. Because of LSE’s lower valuations, Round 1 belongs to the London-based company.

Winner: LSE

Round 2: Profitability

In Round 2, we square off the companies’ based on their profitability and look at their profit margins and return on equity (ROE). Higher profit margins tell us that the company’s more efficient at turning each dollar of revenue into profit. ROE measures the efficiency of a company’s ability to turn each dollar of shareholder’s capital into profit. Generally, the higher a company’s ROE, the better its efficiency.

  SGX LSE
Gross Margins 87.5% 92.2%
Net Margins 45.0% 24.0%
Return on Equity 39.0% 14.7%
*Based on last 12 month’s financial figures

SGX runs a much tighter ship here with regard to its profitability. It has much higher net margins and ROE than LSE, and so takes Round 2!

Winner: SGX

Round 3: Growth

The Foolish Face-off’s final round sees us turn our attention toward a business’s revenue, profit, and dividend growth. Shareholders ultimately benefit from a business when it increases its intrinsic value by selling more of its products and services and increasing profits. Growing dividends also provide additional returns for shareholders, enriching them even further over time.

  SGX LSE
Revenue Growth CAGR -4.2% 10.5%
EPS Growth CAGR -11.8% 6.6%
Dividend Growth CAGR -2.9% 8.1%
*The financial figures here are based on the companies’ last five completed finnancial years.
**EPS figures for LSE is based on its normalised earnings.

Here, we see LSE having superior growth compared to SGX in all three aspects. Usually, companies with a smaller revenue base are often the ones growing at a faster rate, but unfortunately for SGX, that’s not the case here.  It’s clear that LSE is the winner in Round 3.

Winner: LSE

Foolish Bottom Line

Final Score: 2-1 to LSE!

From a cursory glance at the two companies, it seems that SGX failed to clear the final hurdle. It has not been able to grow its business and trades at higher valuations. There’s a positive though, as it displayed better profitability.

This has been a fun and friendly contest but do note that definite conclusions cannot be made. There are other important factors to consider in a business (such as its competitive advantages and cash-flow situation) that we did not cover.

If you would like to know more about other businesses, do stay tuned as we bring you more in our series of Foolish Face-offs. Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.