Would Peter Lynch Buy Singapore Exchange Ltd?

Peter Lynch once said that in business, competition is never as healthy as total domination. There is more than a grain of truth in that pithy statement. But how would a totally-dominant Singapore Exchange (SGX: S68) stack up as a Peter Lynch stock.

Singapore Exchange is the main provider of services related to securities transactions and derivatives trading in Singapore. In other words, if you want to buy and sell shares in Singapore in any shape or form, the trades will have to go through SGX. That is how dominant the company is, which explains the premium that investors are prepared to pay for its shares.

At S$8.11, the market is valuing the company at around 27 times trailing earnings. That is not cheap when the entire Singapore market is only valued at 14 times historic profits. That said, the current valuation is roughly in line with its historic PE ratio.

By itself, the PE is only useful up to a point for growth investors. So, Lynch likes to relate the PE ratio to the growth in earnings through the Price-to-Earnings-to-Growth ratio. In the case of SGX, its PEG ratio is probably too high for Lynch because bottom-line profits have not grown quickly enough.

In its favour, though, is a lack of debt. Peter Lynch likes companies that have a low Debt-to-Equity ratio. SGX has no debt. In fact, the company has S$865m of cash in the bank, which allows it to pay a generous dividend.

The dividend yield of 3.4% is roughly in line with the market average. But the payout ratio is 93%. That could delight income investors but perhaps not Peter Lynch. Growth investors would like to see a decent portion of profits retained to drive growth.

While SGX ticks some of the box, it probably doesn’t tick enough of them for a growth investor such as Peter Lynch. It is probably more like a utility business that could appeal to a Buffett-type investor.

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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 Director David Kuo doesn’t own shares in any companies mentioned.