Published January 9, 2009

Analysts differ in views on outlook for stock of Singapore Exchange

By LYNETTE KHOO

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GIVEN the opposing views on the direction of the stock market, analysts have issued different recommendations on the Singapore Exchange (SGX) stock, which is a proxy to trading activities.

CIMB-GK research head Kenneth Ng, who issued an 'outperform' call on SGX this week, said he is positive on the counter in view of available liquidity sitting on the sidelines.

'In such an environment, we do not subscribe to the view that stockmarket trading volumes will grind lower and lower consistently,' Mr Ng said.

'Instead, we believe that 2009 could be a year of stop-start rallies, where several bouts of short-lived rallies prove to be false starts before a final bottom and recovery takes shape in late 2009,' he added. 'This could be positive for stockmarket turnover.'

Mr Ng noted that the turnover velocity in December, which was at an all-time low with average daily volume (ADV) at $1.09 billion, provides an entry point. The last time such a level was seen was in 2005. He is predicting ADV for FY09 ending June 30 to be as low as $1.05 billion.

But the expected 'Capricorn effect' - where there is a general rise in stock prices during January - is expected to benefit SGX, Mr Ng said. At the same time, SGX's derivatives segment could stay buoyed by a pipeline of new products.

The next key product - extended settlement contracts, or commonly known as single-stock derivatives (SSDs) - will be launched on Jan 23.

But Mr Ng trimmed his target price on SGX to $6.39 from $6.51 after cutting his earnings forecast for the group on lower securities turnover assumptions.

On the other side of the pendulum, DMG & Partners Securities and Kim Eng Research are keeping their 'sell' recommendations on the stock in light of weak stockmarket volumes.

Kim Eng Research believes that the stock's appeal is limited by a lacklustre earnings outlook due to continuing weakness in trading volumes, as well as its premium valuations of 20 times FY09 price-to- earnings ratio (PE) and 6 times price-to-book value (PB) compared with the Straits Times Index's 10.9 times PE.

But the short-term weakness aside, Kim Eng said it believes SGX is a good investment in the long term as it offers high beta to ride a market recovery and is committed to a stable dividend payout. SGX's derivative income stream is also likely to stay robust on the back of more product launches. The research house is keeping its target price of $4.90.

In a note this week, DMG & Partners Securities analyst Leng Seng Choon maintained his 'sell' call on SGX with a $3.95 price target based on the assumption that ADV will decline by 47 per cent in FY09.

Mr Leng noted that the recent surge in market activity is not sustainable once the optimism arising from the new US president and the upcoming Jan 22 Singapore Budget wanes off.

'The current SGX share price is factoring a doubling of stockmarket turnover over the next few months,' he said. 'We believe the market is overbullish in this respect.'

Yesterday, along with the broad market decline, SGX slipped 1.8 per cent or 10 cents to close at $5.55.