Many investors would consider Singapore Exchange Limited (SGX: S68), or SGX, to be in an enviable position.
After all, the bourse operator is the only stock exchange in Singapore, endowing it with a natural monopoly.
SGX is also exposed to money flows from the Asian region, particularly China.
This exposure is beneficial to the group as China is viewed as being the next emerging superpower.
Source: Singapore Exchange Analyst Day Presentation Slides
From the diagram above, the exchange is sitting in a “sweet spot” where it enjoys both growth and stability along with exposure to emerging opportunities.
With its core business stable and contributing steady profit and free cash flow, SGX has the opportunity to seek growth through collaborations, joint ventures and acquisitions.
New initiatives such as Climate Impact X, a collaboration with DBS Group (SGX: D05), Temasek Holdings and Standard Chartered Bank (LSE: STAN), open up interesting possibilities for the group to add additional revenue streams.
SGX recently hosted an Analyst Day and released a set of slides on how it plans to grow its business further.
Here are five highlights that investors should be aware of.
The increasing popularity of ETFs
Exchange-traded funds (ETFs) have been gaining in popularity over the years.
For the fiscal year 2020 (FY2020), the assets under management (AUM) for ETFs surged by 57% year on year to S$8.6 billion.
The turnover, measured as the volume of ETFs traded, jumped more than two-and-a-half times to more than S$5 billion.
ETFs tracking the Straits Times Index (SGX: ^STI) crossed S$2 billion, driven by a surge in retail participation.
Of the many types of ETFs, fixed income ones saw their AUM more than double year on year to nearly S$4 billion.
ESG: an increasingly popular theme
The ESG (environment, social and governance) theme has become more dominant as well, with more investors searching for companies with high ESG scores.
SGX has launched risk management solutions for portfolios with ESG names.
Four ESG equity futures that were launched back in January this year.
This product is supported by top pension funds and aligned with the United Nations (UN) Sustainable Development Goals.
This week, SGX also announced two ESG initiatives.
One is the launch of the world’s first ESG REIT derivatives in partnership with Nikkei Inc, Japan’s flagship index calculator and news organisation.
The second is the enabling of bond issuers to showcase their green, social and sustainability bonds to global investors, in its ongoing partnership with Nasdaq Inc (NASDAQ: NDAQ).
Catalysts for capital raising
As a stock exchange, SGX is a platform for companies to raise capital. On this note, the company highlighted three new growth drivers to do so.
One is the recovery in the global REIT market, with a healthy pipeline of potential listings across multiple sectors.
The second is the secondary listing of unicorns (defined as private start-up companies that are worth US$1 billion), again in partnership with Nasdaq.
The third is to act as a possible venue for SPACs (special purpose acquisition companies) to raise money as this form of backdoor listing is gaining traction in major markets.
Foreign exchange opportunities
On the foreign exchange (FX) front, SGX is also pursuing its goal to build an integrated and scalable FX platform.
Currently, the bourse operator offers FX futures on its platform.
With its acquisition of the remaining 80% of BidFX back in June 2020, the idea is to pivot to over-the-counter FX by setting up a multi-dealer platform.
BidFX is a leading cloud-based FX trading platform for institutional investors.
Eventually, SGX intends to set up an OTC FX Electronic Communication Network (ECN) based in Singapore
Once this is achieved, SGX will offer an integrated FX offering consisting of FX Futures and OTC FX.
Enhancing operating leverage
The group has reported a 6% compound annual growth rate (CAGR) in revenue from FY2015 to FY2020.
Assuming a stable market backdrop, SGX expects medium-term revenue CAGR to hit high single-digits.
For expenses, however, they are expected to grow at mid-single-digit CAGR moving forward.
With revenue rising more than expenses, operating leverage should gradually kick in to raise operating profit margins.
Get Smart: Acquisitions to drive further growth
The five aspects above highlight SGX’s commitment to growing the business on multiple fronts, transforming it into an effective multi-asset exchange.
Acquisitions of BidFX and Scientific Beta have led to SGX increasing its suite of offerings to clients.
Moving forward, SGX will continue to look out for acquisition opportunities.
Some criteria include having a strategic fit with SGX, expanding client relationships and a three-year revenue CAGR of more than 10%.
Investors should feel cheered by these initiatives.
All that’s needed now is time for the group to execute these strategies to deliver long-term growth in profits, free cash flow and dividends for investors.
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Disclaimer: Royston Yang owns shares of Singapore Exchange Limited and DBS Group.