Valentine’s Day is upon us again.
It’s a great time to remember to cherish those who are dear to us.
As investors, we should also remember to love the stocks that bring us the most joy. For me, Singapore Exchange Limited (SGX: S68), or SGX, is one such stock.
It was a love affair that started a couple of years ago …
Hit by Cupid’s arrow
I was first attracted to SGX two years ago, after the group had released its fiscal year 2018 (FY 2018) earnings (SGX has a 30 June year-end).
The presentation slides provided a good summary of SGX’s plans to evolve the group into a leading multi-asset exchange.
As I watched CEO Loh Boon Chye handle questions from analysts, it struck me that this was a man who knew his stuff and that he had a vision of what SGX would be in years to come.
By executing on its strategic initiatives, SGX would become the premier go-to place for investors and traders who seek a wide variety of securities for their various needs.
Back in 2018, security volumes were already headed downwards, causing the equities and fixed income revenue to dwindle.
However, SGX’s derivatives division turned out to be its shining star, as it came up with innovative new products that served clients’ needs and allowed them to conduct effective portfolio risk management.
To that end, SGX offered a wide range of derivatives in equities, foreign exchange as well as commodities.
3-pillar strategy for growth
SGX relies on a three-pillar strategy as part of its overall growth strategy.
The first is to build a multi-asset stock exchange, and it has been successful in this regard by introducing popular derivative products such as the FTSE China A50 Index Futures, FlexC FX Futures (for foreign exchange) and Rubber Options (for commodities).
The second pillar is to grow the group’s international presence in order to attract more potential clients and investors. New offices were opened in New York and San Francisco during FY 2019, and resources were expanded in London.
The last pillar is to “widen partnerships and networks” through strategic investments in financial companies as well as acquisitions.
Examples of investments that SGX made during FY 2019 were Trumid, BidFX and Freightos to support the growth of its Fixed Income, Currencies and Commodities businesses.
Just last month, SGX concluded the purchase of a 93% stake in Scientific Beta for EUR 186 million. Scientific Beta is a smart beta index firm that will strengthen SGX’s research-based index design capabilities. This acquisition is expected to be earnings accretive in FY 2021.
This calendar year so far has been marred by the outbreak of a virus known as the “Covid-2019”, a new flu-like bug that has sickened tens of thousands in China with pneumonia and killed more than 1,300 people to date.
SGX’s business, however, remained virus-resistant.
The group released its market statistics for January 2020 early this week, and both securities and derivatives markets continued to post broad-based growth.
The statistics came as a surprise to me as I had expected some fallout from Covid-19, but as it turns out, SGX’s business was cruising along just fine. The data shows how resilient SGX’s business was.
Even if there was increased volatility arising from economic shocks, SGX stands to benefit as more clients would flock to its suite of risk management products.
Get Smart: Falling in love again
SGX has posted a strong 1H 2020 set of earnings, with revenue up 11% year-on-year, operating profit up 16% year-on-year and net profit up 14% year-on-year.
True to form, the bourse operator declared a 7.5 cent quarterly dividend, maintaining its full-year trailing dividend of 30 cents.
At SGX’s last traded price of S$9.15, this represented a historical dividend yield of 3.3%.
With a generous dividend paid quarterly, an astute management team and a clear vision for growth, there are indeed many reasons to fall in love with SGX this Valentine’s Day.
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Disclaimer: Royston Yang owns shares in Singapore Exchange Limited.