The Revolving Door At Singapore Exchange Spells Exciting Changes

It doesn’t seem like five-and-a-half years is in anyway long enough for a chief executive to start and executive a business strategy. But that is how long Magnus Bocker was given to man the helm at Singapore Exchange (SGX: S68).

He has been replaced by ex-banker Loh Boon Chye, who plans to reinvigorate the quiet Singapore stock market. Amongst the things that Loh plans to do is to reignite Initial Public Offerings in Singapore, which has been noticeably moribund.

But does the overuse of the revolving door really matter? Warren Buffett has a view about this.

The Sage of Omaha once said that good jockeys will do well on good horses but not on broken-down nags. In other words, when the underlying fundamentals of an industry are crumbling, a good manager might be able to slow down the rate of decline. But in the long run, even excellent managers cannot prevent the inevitable from happening.

The question for investors is whether SGX should be seen as a thoroughbred with potential or a horse that is ready for putting to pasture.

There is little evidence that the stock market industry is a sunset industry. Since 1 December 2009 when Bocker took charge, revenues have been flattish, while profits have inched up. Dividends have crept ahead from S$0.26 to S$0.28 per share.

Over the same period, revenues at Hong Kong Exchange & Clearing have increased around 40%, while profits have improved 15%. But the annual payout was unchanged.

It is easy, sometimes, to forget just how bad things were in financial industry during and after the financial crisis. Investors were badly bruised and some financial institutions were on the edge of bankruptcy.

But in the five years that Bocker was in charge, he has built up the cash pile at Singapore Exchange, and improved Total Shareholder Equity. The latter has increased from around S$1.8b to S$2.6b. On that basis, Bocker has done a good job.

However, the market likes to make comparisons. For instance, Singapore Exchange is valued at 24 times earnings. Hong Kong Exchange is valued at 44 times earnings, while London Stock Exchange is valued at 52 times earnings. So SGX could be worth almost twice its current valuation, if the market deemed it right.

There are compelling why SGX should be worth more. It generates S$37 of profit for every $100 of shareholder equity. By comparison, Hong Kong Exchange & Clearing’s Return on Equity is 24%. London Stock Exchange’s only generates £11 for every £100 of shareholder equity.

Of course Singapore Exchange can improve – every business can always improve. But it is not that clear at this stage whether the departure of Bocker could have much impact on the Exchange’s performance.

If the shuffling at the top are an indication of a change in strategic direction for the bank, then things could get interesting. But bear in mind the sentiment behind Warren Buffett’s sage words – bet on the horse not the jockey.

A version of this article first appeared in the Independent on Sunday.

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