AFR: Singapore brokers shun ASX idea

Australian Financial Review, October 27 2010

The Singaporean financial community has been lukewarm about the merger with the ASX, citing uncertain synergies, a high price, and a lack of any compelling logic for going ahead with it.

In particular, analysts – covering SGX as a listed stock rather than its broader role as an exchange – have been scathing. Deutsche Bank analyst Andrew Hill immediately downgraded the stock from buy to hold. “The rationale for the proposed ASX merger is not compelling,” he says, pointing to integration risks, financial leverage and the absence of clear potential to increase revenues. Like many of his peers, Hill notes that the targeted cost synergies of S$39 million (A$30 million) are modest.

CLSA’s Derek Ovington says the merger is “a fundamental strategic negative for SGX”, seeing it as a “major management distraction providing little strategic benefit to SGX’s Asian growth plans.”

Part of the objection is that, perversely, the ASX is too well run to be a successful acquisition target. “ASX is a successful and progressive exchange, integrated both vertically from trading through to clearing and horizontally across cash equities, fixed income and derivatives,” Ovington says. The sense is there would be more obvious cost-cutting benefits if SGX took over an exchange with great volume and listing potential but with flabby management that could be swiftly improved.

In a report, Ovington also bemoaned the overwhelmingly domestic tilt to the ASX, saying: “We see little additional value that SGX can add to the ASX product set and vice versa.”

Srikanth Vadlamani at Nomura in Singapore says the merger would be good for Singapore if it brought more IPOs to the city state. “A game changer would be if SGX is able to significantly improve its attractiveness as a listing venue vis-à-vis HKEX [the Hong Kong exchange] on account of this deal,” he says. But he says he is “sceptical” of that happening.

Harsh Modi at JP Morgan doesn’t like the fact that this is a corporate merger rather than an exchange-level merger: it simply creates a dual listed company with two holding companies, and hence limits synergy benefits. “By contrast, a complete exchange-level merger with a single trading venue would allow pooling of liquidity,” he said in a report.

However the deal has found a brighter reception among fund managers who see the long-term rationale as more compelling. “From an SGX point of view, we view it as positive and we can totally see why SGX wants to do it,” says Peter Sartori of Treasury Asia Asset Management in Singapore. “They need to grow, particularly with the competition from Hong Kong and the Chinese exchanges. And they need to get scale. Acquiring the ASX provides them with both of these.” Sartori argues that since SGX’s stock is expensive – a price/earnings ratio of 25 times compared to 19 for the ASX, even after yesterday’s share price movements – and therefore it makes sense to do the deal now, largely for stock. “All in all, a good deal for SGX.”

And local brokers like the idea, hoping that dual listings, direct trading of shares on both bourses and reduced costs should drive business. Loh Hoon Sun, managing director at Philip Securities says it will reduce the cost of Singaporeans having to go through an Australian broker to reach Australian stock. And SIAS Research investment analyst Liu Jinshu says: “If, in Singapore, I could trade BHP or Rio Tinto, or the Australians can trade companies listed in Singapore, there will be more trading volume and more liquidity for both exchanges.”