SGX - Recent strength in equities market may not be sustained

We maintain our SELL call on SGX. There was a clear pick-up on equities trading value in May 09, with a ADT of S$2.27b, almost 3x Dec 08’s S$0.79b, which led to the rally in SGX’s share price. However, Jun 09’s ADT has since fallen to S$1.75b and we expect the weakening trend to persist. Our S$6.20 target price is pegged to 20x FY10 P/E, which is close to the 21x that SGX traded over the past 3.5 years.

Equities market turnover value seen to weaken. Signs of “green shoots” have led to a rally in the equities market over the past 3-4 months. May 09 recorded a ADT of S$2.27b, which is only 25% lower than the peak of S$3.03b in Oct 07 during the bull run. However, we are of the view that global economic concerns will keep the equities market subdued over the next few months. Hence, we are forecasting FY10 ADT of S$1.36b.

Futures trading volume has also been lacklustre. May 09 futures trading volume of 4.28m is weaker than the 4.60m in Apr 09 and 4.84m in Mar 09. This will also lead to subdued earnings.

Our sensitivity analysis shows that SGX target price would be S$7.10 if FY10 ADT hits S$1.71b, or S$7.90 if ADT is S$2.05b. For investors who are more optimistic on the market trading volumes, they can trade on SGX. However, we are not so optimistic.

The listing of XingQuan Sports International, a Chinese shoemaker, on Bursa Malaysia, may mark the listing of more Chinese companies on the Malaysian bourse. This could lead to slower listings of S-chips on SGX and impact on its long term ADT growth.

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