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Investing in SGX shares

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Ex-CEO of SGX, Magnus Bocker passed away last week due to cancer. Bocker came to Singapore with a big reputation of being a dealmaker. Prior to heading SGX, he made his name for selling OMX to Nasdaq for USD4.9 billion. Bocker took over from outgoing CEO Hsieh Fu Hua in 2009 but left in 2015 when he decided not to renew his contract. In this article, l am sharing my views on whether it is worthwhile to invest in SGX shares.

Under Bocker’s tenure, SGX implemented various initiatives aimed at expanding SGX’s market share beyond the stock market. Notably, revenue from derivatives now formed 40% of the annual revenue.  As a dealmaker, he also tried to transfer his merger and acquisition experience to SGX and made a bid to merge with Australia’s ASX. That bid ended up in failure when the Australian government rejected the proposal.

Bocker’s reign also saw SGX introducing a slew of policies targeted at boosting market liquidity and protecting investor’s interest. In 2014, dynamic circuit breaker was introduced to guard against disorderly situations in the face of rapid and unchecked market movements. In light of the penny stock crash in 2013, Minimum Trading Price (MTP) was introduced by SGX to prevent speculation and market manipulation. The initial rule required companies to maintain trading price of $0.20.

Bocker was widely credited with reducing the standard board lot size of securities listed on SGX from 1,000 to 100 units from 19 January 2015. It was envisioned that smaller board lot size will make it more affordable for retail investors to invest in a wider range of equities, including blue chips, and enable them to build more balanced and diversified portfolios.

SGX shares

It was the Bocker’s idea of removing the trading lunch break on 1 March 2011 that led to his ultimate downfall. In a press release, Bocker claimed that “Singapore’s leading position as an international financial centre depends on its ability to stay nimble and meet customers’ needs. Investors are constantly seeking trading opportunities and continuous all-day securities trading will provide more avenues for participants to invest, hedge and arbitrage their investments.”

Nonetheless, many remisiers did not agree with Bocker and there was an online petition calling for his resignation. Many of them were irked by Bocker’s relentless new initiatives and the removal of their lunch break was the last straw.

And then there were the 5 November and 3 December 2014 trading outages. The trading disruptions raised many eyebrows as SGX had enhanced its trading system by investing $250 million in a new trading engine when Bocker took over as CEO. Many investors took Bocker to task for the market disruptions and that swiftly led to his exit in early 2015.

To his credit, under Bocker’s leadership, SGX grew from strength to strength. Revenue increased from $648 million in FY2012 to $801 million in FY2017. Net profit increased from $292 million in FY2012 to $340 million in FY2017. The strong set of results indicated that Bocker’s strategy of diversifying SGX’s revenue stream worked like magic. After his departure, he had left behind a company in good shape for his successor.

Read my articles on SGX:

  1. SGX Bull Charge 2017
  2. SGX’s 1QFY2017 results
  3. SGX to revise Minimum Trading Price Rule
  4. SGX’s Hall of Shame

What is interesting about SGX shares is that the Return on Equity (ROE) has been consistently high for the past few years. The average ROE between FY2012 and FY2016 was 36.4%. ROE measures the ability of the management to generate returns using shareholder’s fund. SGX’s high ROE over the years demonstrated the management’s ability to grow the company consistently. In the 90s, SingTel used to have this sort of this sort of explosive ROE rates but subsequent growth has tapered in view of the slowing economy in recent years.

Another attractive thing about SGX is that it does not owe any debts and is sitting on a huge pile of cash. For FY2017, the cash and cash equivalents was $796 million. Its operation generated cash amounting to $444 million. With so much cash on hand, SGX used cash of $120 million to acquire Baltic Exchange Limited (BEL). In this respect, I like management that deploy excess cash to acquire businesses to spur growth. In doing so, SGX is essentially building for the future.

The principal activity of BEL is to provide freight market indices and information, membership services and facilities for the trading of derivatives shipping contracts. This acquisition should strengthen SGX’s ability to further develop forward freight agreement (“FFA”) related products.

The acquired business contributed revenue of $8.2 million and $0.2 million net loss after tax to the Group for the period from 8 November 2016 to 30 June 2017. Had BEL been consolidated from 1 July 2016, consolidated revenue and consolidated profit of the Group for the period ended 30 June 2017 would have been $804.2 million and $334.6 million respectively.

Hence, going forward, BEL should contribute significantly to SGX’s revenue and profits. Given that SGX’s annual profit for FY2017 was $340 million, BEL could potentially be its major flagship subsidiary based on the potential profit contribution. In this regard, I am very bullish on SGX’s share price for the coming years.

In terms of expense control, SGX’s management has performed well as full year expenses amounted to $399.0 million ($409.0 million) include costs relating to BEL of $12.6 million. Excluding this, expenses would be $386.4 million, a decrease of 5% from a year ago. This decrease is mainly due to lower processing and royalty fees and technology expenses. Moving forward, SGX should invest more in technology to address the trading disruptions in previous years.

For the past 5 years, SGX’s share price has followed a similar pattern. After August, its share will go on a bearish trend and bottom out till the end of the year. The start of the year will often see the shares surge. I presume that the dividend pay-outs played a part in the share price’s movement. Hence, this time, I think the same pattern will continue to play out. However, the profit contribution from BEL could potentially drive up SGX’s share price to a much higher level.

Thus, my strategy is to catch the stock when it is trading at $7.00. The basis for investing in SGX shares stem from its acquisition of the Baltic Exchange Limited. Going forward, I hope to see SGX acquire more companies to diversify its earnings. Previously, its key sources of earnings were through equity and IPO listing fees. To compete with arch rival Hong Kong, SGX must continue to expand its investment moat.

For wealth builders, by wealth builders

This year, Singapore bourse operator is doing its part as usual by organizing the annual charity run, SGX Bull Charge. The event resonates with what I am trying to achieve with this blog, SG Wealth Builder. Since 2004, SGX Bull Charge has been rallying the financial community and companies together for a common goal – empowering communities through financial literacy. This event has raised more than $29 million and supported over 50 charities.

This year, SGX is aiming for an expected turnout of between 8000 to 1000 participants. To achieve this, SGX is engaging financial bloggers to help raise awareness about this charity run. As this is an event for wealth builders, by wealth builders, I am doing my part to raise public awareness through this article. The details of the event:

Date 17 November 2017 Venue F1 Pit Time 4.00pm – 9.30pm

There are three run categories to choose from and those are interested can check out the details here.

Complimentary Run Entries

SGX has given me 10 complimentary run entries for my readers. If you are interested in the run, please subscribe to my blog and then email me at sgwealthbuilder@gmail.com to indicate your interest. Please remember to include your name. For those who are already my blog subscribers, you may also write in to me to indicate your interest. I would randomly pick ten lucky winners and forward to SGX by 31 August.

Apart from the run, there is also the opportunity for wealth builders to network around because the participants are mostly from the financial industry. I will also be there for the run. So see you guys at SGX Bull Charge 2017 on 17 November 2017!

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Magically yours,

SG Wealth Builder

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