SGX Opinion

I hope Chinese New Year is great for everybody, a good break amidst a busy schedule! One more stock which I am interested in is SGX. My recent thoughts were invoked by this article which was about the 'shrinking stock market' in Singapore. From face value, this translates into a lower trading volume which does not bide well for SGX. But I thought it would be interesting to read the financial statements.

Here is the quick look at the financial performance for this quarter.

Source: SGX 2Q 2019 Financial Presentation

Net profit went up in spite of an increasing expense.

A breakdown in the revenue shows that the bulk of increased profit came from derivatives trading. Market data and connectivity also helped contribute an increase in revenue. Notably, SDAV (security daily average value) went down which contributed a slight drop in revenue. This is in tandem with the article which I posted above. Other factors contributing to the decline included a drop in fixed income revenue too.

Source: SGX 2Q 2019 Financial Presentation

Dividend for this quarter stands at 7.5 cents which is a comfortable amount given that earnings per share is 9 cents.

Source: SGX 2Q 2019 Financial Presentation

I think I have mentioned before in my previous posts but potential risks include a possible trade war and interest rate hikes, which will affect the financial markets. From the recent financial statements, we can also infer that there is a shift of preference from the traditional stock market trading to derivative trading, which is pretty notable. In volatile times, more market participants might turn to derivatives either to hedge or initiate a position.

Besides this, what I like is SGX's dividend policy, which the management will aim to pay 7.5 cents per quarter. Of course, we cannot 100% take their words for it, but a word of assurance does help boost investor confidence. We do note that dividends per share are currently below earnings per share too.

With reference to the article which I posted, there is some worry that companies will choose the HK market over Singapore due to the higher liquidity there, which will affect SGX's business as a whole. Since the derivatives section for SGX seems to be the highlight for now, it is pretty good that an increase in volatility will mean an increase in derivatives trading. Currently SGX is trading at 7.7 with a PE of around 22. Dividend yield is 3.89% at current price, assuming 30 cent dividend policy stays constant. The 52-week low is 6.72 which is pretty far from its current price. At that price, dividend yield is 4.46% instead.

If we go by 'common sense', SGX can be considered a defensive stock with no natural competitors here. But we should not forget that SGX has competitors nearby in Hong Kong where IPOs can flock to.

I will be looking to accumulate at 7 which seems to be the last support here.

Happy Valentines too! :)

Learning the Shiller Ratio and some random thoughts

Happy Chinese New Year everybody! I can't believe that it has been 2 months since I started blogging.

I guess if you have been following my previous posts, I am mainly concerned about the current valuation of the stock market as it gives me an indication of when to buy. So one thing that caught my eye on Investopedia was this which was quite interesting to me.

The Shiller Ratio is a measure which is equivalent to the current price divided by the average of 10-year period of real earnings per share. It is inherently an extension of the Price-Earnings ratio, albeit adjusted for inflation and different phases of a normal economic cycle. It is a ratio to determine an overvaluation or undervaluation of any financial asset, but also accounting for cyclical factors that artificially inflate or deflate a company's earnings.

Of course, Singapore is my main point of interest, so I managed to find the historic Shiller Ratio from the Barclays website.

Source: Barclays Shiller Ratio (Singapore)

As of 31 December 2018, Singapore's Shiller Ratio stands at 15.21, which is pretty decent considering that it is rather low given the peaks you see in the above diagram. Notably, the peak was around 35 in October 2007 before plummeting during the Great Financial Crisis. Looking at current levels, it does seem compelling for a buy.

Let's look at the pros and cons here. The pros should be quite evident, where the Shiller Ratio has accounted for expanding and contracting business cycles using a 10-year period to smooth earnings, which is not represented in a normal PE ratio. This can ensure that outliers like the Great Financial Crisis will not greatly affect the conclusion we will get. After all, this is all about the law of large numbers, where the end result should be stable and generally similar.

Obviously, there are some disadvantages which might/might not be of significance. I think the first point is that the Shiller Ratio is based on past data which is retrospective and does not provide any prospective meaning, aka knowing what happens in the past does not make you 100% sure about what the future entails. 

But still, I think the Shiller Ratio is a good enough gauge for us to assess the valuation of the market.

As we celebrate Chinese New Year in Singapore, US markets are still up and running so I thought I should have a look there too 

I am currently thinking of diversifying outside of Singapore and buying some undervalued US shares but if we do apply the Shiller Ratio which we previously discussed, it seems that the US market is even more overvalued than the Singapore market.

Source: Barclays Shiller Ratio (Singapore and USA)

The US market has a Shiller score of 26.64 which represents a pretty huge margin over Singapore's score of 15.21, which generally means it is harder to find undervalued gems in the market. But it is always good to shortlist first, and then pull the trigger later.

The current Shiller Ratio for the S&P 500 is 29.75, with mean of 16.6, median of 15.7 and a range from 4.78 to 44.19, where the current market is slightly overvalued and above its mean.

My recent call on SATS at 4.5 has not been feasible, where SATS is trading at 4.8 currently. Parkwaylife Reit is also at 2.79 and Capitamall Trust at 2.39 which is a tad too high for my taste. Mapletree Industrial is at 1.99 and Mapletree NAC is at 1.25. All the stocks had run up pretty high after my writing so I didn't get the chance to buy. But I do hope I am rewarded for my patience as I am of the view that high prices don't always last, just like how bullish markets don't continue forever. We will see again!

I will write more again after the new year about some US stocks I had some interest in. But for now, it's visiting time. Cheers to the new year ahead!