We recommend buying every dip on the stock price as we expect trading velocity to increase, albeit in the midst of continued volatility. The stock has underperformed the STI by 8.4% since our downgrade on 14 May, and we believe the seasonality and consolidation of volumes have played out and that the risk-return has turned positive. In addition to securities trading volumes, we expect increased derivative volumes (23% of revenues) and IPO pipeline to support earnings and re-rating.
SGX remains a fundamentally strong franchise in the medium term. The exchange continues to deliver product innovation and solid balance sheet and enjoys a monopoly in cash securities clearing. SGX stock price tends to be volatile as both PE and EPS expectations get revised simultaneously. We believe the stock is entering a phase of earnings momentum, and hence will be driven by earnings upgrade and PE re-rating. Please refer to page 4 for detailed view on valuation parameters for exchanges in various phases of investment cycle.
Key risks to our call include negative momentum as the stock acts as a high beta proxy to broader markets in the short term. Also, alternative trading platforms pose risks to SGX revenues, and hence also to our price target and recommendation. Please click on this link for our note dated 8 September 2008 for details on dark pools/alternatives.
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