With a market capitalization of around S$8 billion, the Singapore Exchange (SGX: S68) is the only local bourse within the lion city. Since its listing on its own Mainboard in 2000, SGX’s monopoly position has allowed it to be one of the most profitable companies amongst the STI constituents. However, does a current valuation of 27x P/E and 10x P/B really justify the price to pay for its stock? Clearly, the market is still projecting huge growth potential for the company despite tepid trading volume.
The Singapore Exchange derives its revenue from various operations, including the securities business, depository services and derivatives. Running on a relatively low fixed costs, SGX is able to generate net profit margin of around 47% between FY2004 and FY2014 (fiscal year ending Jun).
As a local bourse operator, the Singapore Exchange does not require significant capital outlay to run its business. With a total asset size of S$2 billion, 87% of which accounts for liquid assets. Its fixed assets + software capitalized amounts to S$173 million, < 10% of its total assets. Other than computer software costs, software capitalized also include software licenses. Since the Group’s working capital mainly comprised of daily settlement of accounts for due contracts to be received/payable to clearing members and settlement banks, the company consistently generates large operating cash flow. With low capital outlay to maintain and grow the business, SGX is able to build up a large cash reserve of around S$838 million over the past decade in its balance sheet. With a total debt/equity of 1.55x, SGX is able to garner > 35% in ROE since FY2006. Even during the global financial crisis, SGX has been able to maintain the high return on shareholders’ equity.
So, the question remains, does SGX’s business justify its current pricing? Comparing to its peers, the Hong Kong Stock Exchange (HKSE: 0388) is currently trading at 40x P/E, the Australian Stock Exchange (ASX: ASX) is trading at 17.5x P/E and London Stock Exchange (LON: LSE) trading at 21.4x P/E.
Value in Action
As a self-regulatory organization which holds monopoly power in its industry, the Singapore Exchange has a high barrier to entry which creates a substantial moat in its business.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.