With books for the international offer said to have closed on Tuesday about 15 times ovesubscribed, the Merrill Lynch and DBS-led deal was priced yesterday (Wednesday) at S$1.10 per share, raising S$470 million ($269 million).
Institutional investors will be allocated 190 million of the 278 million shares on offer, with employees receiving 13 million and retail investors 75 million in a public offering scheduled to close on November 21. Alongside the placement tranche, there is also a strategic tranche which will close at the same time as the retail offer. This comprises 150 million shares, representing 15% of the company and will also be open to former exchange members, who can subscribe to up to one third of the shares they already own. The number of shares on offer overall was increased after the popularity of the deal became evident and it is now envisaged that post IPO the govermnent will maintain a 25% stake.
Initially, market participants had thought the stock would be more attractive to retail investors who would view it a as a proxy for Singapore. Institutions were thought likely to be more wary of the exchange's future growth prospects.
Yet, fund managers comment that a combination of low valuation and attractive dividend yield is reason enough. Both were felt to be needed to compensate for the fact that over the coming few years, the exchange is facing flat to declining revenues and higher operating expenses from investments in technology.
As Daiwa SB Investments Steve Lim puts it, "We think the IPO price offers about 25% in upside to bring SGX in line with the Hong Kong and Australian exchanges which are already listed. At this point in time, the stock's main attraction is its valuation, but over time the exchange can grow by developing new products and using its large cash pile to buy stakes in other exchanges."
According to local analysts, SGX will be listed on a price to book value of roughly 1.25 times, versus a roughly 1 times ratio for Hong Kong Exchanges & Clearing (HKEx) at the time of its listing by introduction in June. However, as one analysts adds, "HKEx listed at HK$3.99, but is now trading at HK$16.05, a price to book value of over 3 times by our estimates. Australia is even higher still, at 8.1 times."
On a price/earnings basis, the offering has been priced at 12.4 times prospective earnings, against 16.4 times for HKEx and 20 times for Australia.
So too, SGX has said that it will be pay a dividend of 5.5 cents per share, equating to a net yield of 5%. Going forwards, it has also said that annual dividends will amount to at least 50% of net income. This compares extremely favourably with other blue chip heavy weights. The Singapore Mass Rail Transit (SMRT), for example, was priced with a 4.43% dividend yield at the time of its IPO in July, but has since dropped down to about 3.86%.
Bankers say that the book was surprisingly well spread both in terms of geography and investor type. Initial allocation splits saw 40% placed in Asia, 40% in Europe and 20% in the US.
Says one banker, "This was a very high quality book and interest was strong primarily because the exchange did such a good job marketing more than just its base case story. It emphasised that it would use its balance sheet to forge strategic global alliances and create new products. It also highlighted that de-regulation of brokerage commissions could be positive going forwards because it creates increased velocity."
Lim, however, believes that although SGX has potential, it will have to work hard to maintain the growth rates achieved by HKEx. "Unlike Hong Kong, we don't have the equivalent of a China using us as a listing centre, so the number of companies that list here will always be smaller," he explains. "We can offer a market to neighbouring countries such as Indonesia and we have already had some success with companies from the Philippines."
"But," he adds, "I think greater potential comes from buying stakes in other exchanges. Singapore can also offer a more cost competitive environment and you can already see the moves the exchange is making to position itself as a clearing centre."
In the past month alone the exchange has, for example, announced an MOU with the Indonesian Central Securities Depository to establish cross-border settlement and the commencement of discussions with the Australian Derivatives Exchange (ADX) to establish cross-access and clearing.
For analysts, however, the stock does not sit at the top of many buy lists. A number cited escalating technology costs and changes to the structure of Singapore's old fixed brokerage commissions as the two main reasons to be wary. "It's a horrible industry to be in at the moment because of the de-regulation," says one. "SGX derives 90% of its revenue from clearing fees. These will fall substantially now that commissions are fully negotiable and trading volumes are dropping because of negative market conditions."
And a second adds, "SGX does not deserve a high valuation because $600 million of its $900 million book value is in the form of cash. Like most Singaporean companies, the company has no debt and is sitting on a large amount of money it doesn't know what to do with."
Presently, the main board on the Hong Kong Stock Exchange has a market capitalisation of roughly $577 billion with 727 companies listed, while GEM accounts for a further $6.539 billion and 49 companies. By contrast, Singapore's main board has a market capitalisation of about $230 billion, with Sesdaq accounting for $2.78 billion and Clob International $84.3 billion. As of the end of October, the three boards respectively housed 385, 90 and 18 companies.
As of Year End December 31 1999, HKEx recorded a net income of $66.67 million. Singapore, despite its smaller size, was almost equal recording $58.7 million to the Year Ended June 30.
