Singapore Exchange Limited (SGX: S68) is the only local stock market operator and regulator in town. It provides listing, trading, clearing, settlement, depository and data services, and can be considered an “international” exchange as nearly 40% of the listed companies on its platform are from outside of Singapore. It is also the world’s most liquid offshore market for Asian derivatives. From the most-recent high of S$8.49 seen on 23 Jan 2018, Singapore Exchange’s stock price has fallen by 16% to end at S$7.13 yesterday. At that price, it is a whisker away from a 52-week intraday low of S$7.06. Is…
Singapore Exchange Limited (SGX: S68) is the only local stock market operator and regulator in town. It provides listing, trading, clearing, settlement, depository and data services, and can be considered an “international” exchange as nearly 40% of the listed companies on its platform are from outside of Singapore. It is also the world’s most liquid offshore market for Asian derivatives.
From the most-recent high of S$8.49 seen on 23 Jan 2018, Singapore Exchange’s stock price has fallen by 16% to end at S$7.13 yesterday. At that price, it is a whisker away from a 52-week intraday low of S$7.06. Is the company cheap now? I think so.
“Nifty, oh Nifty”
The main cause for Singapore Exchange’s recent stock price decline revolves around the company’s suite of derivative products based on the India stock market. These products are known as the Nifty derivative products.
In February this year, the National Stock Exchange of India (NSE), the Bombay Stock Exchange, and the Metropolitan Stock Exchange of India, said that they would stop licensing their data to overseas exchanges, including Singapore Exchange. Singapore Exchange offers trading and clearing of India equity derivatives to clients all over the world. After the Indian exchanges’ announcement, Singapore Exchange said that the derivatives would be available for trading till August 2018 at the minimum, as per the licence agreement with the NSE.
A few months later, Singapore Exchange announced that, in lieu of the current India equity derivatives, it would be developing and launching new India equity derivative products in June 2018. But, this announcement made the NSE file an application in the Bombay High Court for an interim injunction on Singapore Exchange’s new India equity derivative products.
Fast forward to mid-June, and Singapore Exchange updated the market that it has been “granted a licence extension to continue the listing and trading of SGX Nifty contracts beyond August 2018.” The company added that arbitration proceedings are continuing, and that the hearings on evidence are expected to start early next year.
All hope’s not lost
I think that the market has overreacted to the whole Nifty saga. I did my own back-of-the-envelope calculations to see if Singapore Exchange’s current share price provides any value.
For the year ended 30 June 2017 (FY2017), the Nifty suite of derivative products accounted for at most 13.5% of Singapore Exchange’s total derivatives volume of 165.2 million contracts. The average fee per contract was S$1.18 then. With a conservative 50% markup applied to the Nifty products, the average cost per contract would thus be S$1.77. This would then equate to around S$40 million in revenue for Singapore Exchange coming from the Nifty suite of derivative products.
In FY2017, Singapore Exchange’s total revenue was S$801 million. The S$40 million mentioned above is around 5% of the company’s total revenue. Assuming the same net profit margin for the Nifty products as the overall business, the Nifty products would also have contributed to 5% of Singapore Exchange’s net profit in FY2017. This shows that the disappearance of the Nifty products should not alter Singapore Exchange’s net profit profile significantly.
Since 23 Jan 2018, Singapore Exchange has lost around S$1.5 billion in market capitalisation. This is many times higher than the “lost” revenue and net profit that are related to the Nifty products that I had assumed.
At the current stock price of S$7.13, Singapore Exchange is going at around 22.5 times its FY2017 earnings and 20.9 times its trailing earnings. According to Morningstar, the average five-year price-to-earnings ratio is 23.6. If investors believe that the lack of Nifty products will be a non-event in the long-term, the current valuation may be enticing.
Furthermore, Singapore Exchange currently has a dividend yield of 3.9%, and the dividend appears to be sustainable to me. The yield is also higher than SPDR STI ETF‘s (SGX: ES3) yield of around 3%. The SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of the Straits Times Index (SGX: ^STI).
The Foolish takeaway
Singapore Exchange has a huge moat surrounding its business, and it would be almost impossible for anyone to try to upend it. With a long-term view, this current weakness surrounding the stock price might be an excellent opportunity for savvy investors to take advantage of.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange Limited.