Is Singapore Exchange Limited Overpriced?
Singapore Exchange Limited (SGX: S68), or SGX, has seen its share price soar to a new 5-year high of S$8.85 last Friday. SGX is Singapore’s sole stock exchange and provides a platform for the buying and selling of securities such as equities, derivatives, options, fixed income, and currencies. The bourse also provides clearing, settlement, and listing services to listed companies.
With the share price hitting multiyear highs recently, investors may be wondering if SGX is getting too pricey. Remember that in investing, the aim is to buy shares of great companies at cheap valuations and to sell them if valuations get too lofty. However, the problem here is in determining what “lofty” means, as this is subjective and depends on myriad factors.
There are several methods by which to assess SGX’s valuations in order to determine if its shares are expensive. Let’s examine a few of them.
Share price comparison
Recall that SGX recently released its Q1 2020 earnings (for the quarter ended 30 September 2019). It was a commendable performance with revenue up 19% year on year and net profit up 25% year on year, and SGX also reported that quarterly net profit had hit its highest level in the last 10 years.
If we do a simple comparison of SGX’s share price, the last time it managed to attain a level higher than S$8.85 was way back in 2010, when the share price hit the S$9 to S$10 level. This was around nine years ago, and if profits are now the highest they’ve been in a decade, this does not seem to indicate that SGX is overpriced, as it’s still trading at a price below its 2010 level.
The second method is absolute valuation. As SGX’s earnings per share (EPS) for Q1 2020 was 10.7 Singapore cents, we can annualise this to obtain an FY 2020 EPS of 42.8 Singapore cents. At the shares’ last traded price of S$8.85, SGX is trading at a forward price-to-earnings ratio of around 20.7 times.
Looking back at SGX’s five-year (i.e., FY 2015-2019) historical price-to-forward earnings valuation, it has hovered from 20 times to 23 times. Therefore, the current forward P/E ratio of 20.7 times does not seem expensive at all as it is within the average of the five-year historical range.
The final method is to compare SGX’s valuation against comparable bourses around the world. I have both Hong Kong Exchanges and Clearing Limited (SEHK: 0388) and Nasdaq Inc (NASDAQ: NDAQ) as worthy comparables to SGX. The former is trading at a P/E ratio of 32.2 times, while the latter is trading at 31.2 times.
Granted that both of these bourses are significantly larger than SGX, their valuations are still around 50% higher than that of SGX, and SGX itself is morphing into a multiasset exchange in Asia. From this simple comparison, SGX’s shares do not seem overpriced.
The Foolish conclusion
None of these methods indicate that SGX is overpriced based on its Q1 2020 earnings. However, a word of caution: Investors should ensure that the group can continue to churn out great results because I have used annualised earnings to compute the valuation. If the bourse can maintain its impressive growth rate moving forward, then I can conclude that its shares are not overpriced.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited.