Singapore Exchange Ltd
SGX:S68
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Singapore Exchange Ltd
Earnings Call Analysis
Q4-2023 Analysis
Singapore Exchange Ltd
Despite a complex economic backdrop characterized by high interest rates, inflation, and geopolitical tensions, the company has delivered resilient financial results. A final quarterly dividend of 8.5 cents per share has been proposed, marking an annualized increase of 6.3%. Looking ahead, management aims to achieve a mid-single-digit percentage increase in dividends over the medium term, signalling a cautious yet positive outlook for revenue and earnings growth.
The company's expenses increased by 7.7% to SGD605 million, influenced significantly by the full-year consolidation of MaxxTrader. Absent this effect, expense growth would have been 5.5%. Investment in growing the OTC FX business was a notable contributor to this rise. Future expense growth is projected to be in the mid-single-digit range, driven by higher staff costs and the same investment priorities. Capital expenditures were below the initial guidance last year, but expected to increase in the next fiscal year to SGD75 million to SGD80 million, focusing on the OTC FX business and system architecture.
SGX Group is leveraging its prime position in Asia, a region forecasted to contribute to half of the global growth, with robust performance particularly in derivatives across equities, commodities, and FX despite lower cash equities and index business activity. The company has seen significant gains in the commodity derivatives market, specifically a record increase of 35% in iron ore derivatives volume, and has expanded into transportation segments like container and air freight futures.
SGX FX has experienced record volumes, with over $2.5 trillion traded, a 56% increase from the previous year. With aims to achieve SGD100 billion average daily volume by FY 2025, the group is progressing towards creating an integrated FX marketplace, boosted by the growing demand for currency derivatives and OTC FX volumes. Additionally, SGX Group has pushed the envelope in sustainable derivatives, introducing futures tracking the MSCI Climate Action Index and enhancing tools for investors to finance climate transition.
The company is maintaining a healthy leverage ratio at 1.1 times gross debt to EBITDA, indicating a robust balance sheet. There is a strong focus on establishing partnerships and acquisitions that align with the company's strategic vision as Asia's leading global exchange. With rising interest rates influencing the hurdle rate for acquisitions, there is an emphasis on utilizing both organic and partnership avenues to grow, including a careful examination of incurring additional debt.
Revenue growth is targeted to reach high single digits with the aspiration to manage expense growth in the mid-single digit range. This disciplined approach aims to reward shareholders with steady, albeit moderate, increases in dividend payouts. The company's leadership has expressed confidence in its strategies but acknowledges the need for agility in response to evolving market conditions to achieve the mid-single digit growth.
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Good morning to everybody here today, and to those viewing this session over webcast. Welcome to Singapore Exchange Group's FY '2023 Full Year Results. The agenda for today. First, our CFO, Ng Yao Loong will give a financial highlight and performance briefing, followed by a business update by our CEO, Loh Boon Chye.
So without further ado, let me introduce to you Ng Yao Loong, who is our CFO, to present the financial updates. Yao Loong, please.
Okay. A very good morning. Thank you for joining us this morning. So let me start with our highlights. Our full year financial performance, which has really demonstrated the strength and resilience of our platform in a quite challenging macroeconomic environment. So on an adjusted basis, our Group NPAT or earnings increased just over 10% to SGD503 million, this reflects the underlying performance or business performance as we have stripped off one-off items when we talk about adjusted earnings.
Otherwise, on a GAAP basis the earnings would have been up 26.5% to SGD571 million. The improved underlying earnings was driven first by a revenue growth of 8.7% year-on-year, to almost SGD1.2 billion, and a 1 percentage point lower growth in expenses at 7.7%. As a result our operating profit, our Group earnings margin improved by 50 basis points to 60 basis points.
Now, let me take you through the details of our financial performance. Similar to the first half of FY '23 our derivatives franchise remained the key driver of our Group's revenue growth with a 27% year-on-year increase of SGD116 million. Revenue from our derivatives business which cuts across the different asset classes, contributed about 45% of our Group revenues, so includes both trading and clearing revenue, and also the associated treasury income.
While the overall derivative volumes was flat year-on-year, we did see healthy volume growth from commodities and our exchange traded currency futures. So our commodities daily average volume or DAV increased 35% to reach a new high of 160,000 contracts. Our currency futures volume grew almost 30%, largely driven by our CNH contract, setting a record DAV of 152,000 contracts. And this volume growth reflects the strength of our diversified multi-asset business. It has enabled us to cross sell and also attract a wider range of clients and market makers.
Average fees increased 6.5% to SGD1.61, due to an increase in the proportion of higher full fee paying customers for our key equity derivatives contracts. We saw stronger volume growth in iron ore as well, that contributed. As for our cash market and capital raising businesses, not surprisingly, we saw a revenue decline from fixed income listings, IPOs and cash equities trading. This is due to the quite unprecedented pace of monetary policy tightening by major central banks, and that has affected regional and global stock markets in their level of trading activity, and public and their listing activities.
Before I go into the breakdown of our revenue and expense growth, let me touch on the reconciliation between our GAAP or reported earnings and the adjusted earnings, it’s quite a big difference, this time around. It’s largely, due to non-cash items which are boxed in red. In the first half results, we have already recorded SGD48 million of such net adjustments. For the second half we're recording an additional SGD20 million of net adjustments.
So let me go through these adjustments. First, it's a full year fair value gain of about SGD40 million from our investment in a private equity fund managed by 7RIDGE, reflects the continued strong operating performance of the underlying asset trading technology. This is a single asset fund which invested in the trading software provider TT in short. As they have continued to perform well in the second half of our financial year, our investment in this fund was further revalued upwards by about SGD13 million. In the first half we revalued upwards by SGD27 million so that gave us that SGD40 million uplift. And this fair value adjustment flows through our P&L, given its accounting classification.
Next is a SGD23 million write-back of the forward liability to acquire the remaining 7% stake in Scientific Beta or SB. This forward liability relates to a put and call option agreement with EDHEC which is the 7% minority holder, to acquire its stake in about 18 months' time. We are required to fair value or estimate the value of this forward liability regularly. And given the anticipated operating performance of SB compared to the projections at acquisition. The cost of acquiring this stake has actually come down. And so as -- and this is therefore recognized as an accounting gain and hence, a writeback.
I will not elaborate on the other two items, which I talked about in the first half, the SGD15 million and SGD10 million gain that we had. I'll touch on the green box along the same vein. We also took an SGD8 million impairment of the acquired intangible assets in Scientific Beta, relating to know-how and customers. In any case, we have been amortizing these purchased intangibles at about SGD6 million to SGD7 million a year. So this is an additional impairment. And then the remaining impairment of SGD3 million relates to the value of the Baltic owned land in the UK, due to the weaker UK commercial property market.
Coming to revenue and I'll talk across our three business segments. Our Fixed Income Currencies and Commodities business or FICC, accounts for 28% of our total revenue. It grew 34% to about SGD338 million, from primarily the growth in currencies and commodities. And even if we exclude the revenue impact from MaxxTrader, which we acquired in January 2022. So there was six months in FY '22 and 12 months in FY '23, the FICC revenue will still be up 31%, and clearly this has exceeded our mid-teens revenue growth expectation for the FICC segment.
We see growing momentum in our FX business, both MaxxTrader and OTC, mentioned earlier the almost 30% growth in our on-exchange currency volumes. In the OTC space, the FX ADV grew about 7% year-on-year, to about $76 billion. But if you compare on a half on half basis, i.e., second half of FY '23 versus the first half, we'll actually see a more than 20% growth.
So second half was $83 billion ADV, compared to the first half $68 billion. So this reflects the refocus on client engagement and the uptick in client activities in the second half of FY '23, following the completion of the planned platform migration in the first half of the financial year. Commodities, I mentioned volumes grew 35%. Iron ore continued to be the standout performer. Volumes in iron ore grew 41% year-on-year and in that contract we broadened our range of financial clients in iron ore, proportion of screen trading climbed from 29% to 46%.
Now moving on to equities. Equity derivatives' revenue increased about 17%, this includes clearly both trading and clearing revenue and the associated treasury income. Although, there was a 9% decline in volumes, but this was offset by the higher average fees from our key contracts. Volume in our flagship is A50 contract was lower, given the China sentiments, and the slower than expected growth momentum following its opening, again we have seen it across many other markets as well. As far revenue for cash equities 11% lower came from both a decline in both trading value and also the average fees. SDAV or the securities daily average value declined about 13% to about SGD1.1 billion, primarily driven by our REIT segment and the small and mid-cap stocks.
Average clearing fee declined 0.07 basis points to 2.49 basis points due to a higher participation from active traders and market makers. Revenue from DCI or the Data Connectivity and Indices business was comparable, so we saw higher connectivity revenue from the upselling of services to existing clients, introduction of new GIFT related colo and network services offset by lower revenue from our Index business.
Our Index business has also been affected by the macroenvironment. The asset tracking factors generally underperformed compared to those tracking technology driven kept with the indices, and hence have declined against a year ago. Last month we successfully launched the GIFT Connect in collaboration with our partner NSE. So from a financial reporting purpose, let me just explain why I'm highlighting this slide.
So under this new partnership arrangement, the royalties expense for the GIFT Nifty contract will no longer be applicable. It will be replaced by a revenue share arrangement of which the economics are largely similar. So from a financial reporting perspective, what it means is that, instead of having the royalties expense in our expense segment, the revenue that we share with NSE will be netted off against our trading and clearing revenue.
So wanted to share the FY '23 numbers to illustrate the point. So the pro forma average clearing fee will be actually just 3% or SGD0.05 lower at SGD1.56, as compared to the FY '23 average clearing fee of SDG1.61. It's a pro forma number, it uses the FY '23 numbers, no change in other variables, included in the calculation. So it's just a mere movement of something that was formerly classified as expenses to the revenue line.
So as we -- as the new arrangement takes place from FY '24, I'm giving these numbers well in advance, so that as you look at FY '24 average clearing fees, you will have a right reference point to compare against and that will be the pro forma numbers which I've highlighted in the right hand side of the slide. And this information will be posted on our IR website for reference.
Moving on to expenses on a headline basis, went up 7.7% to SGD605 million. The additional six months from the full year consolidation of MaxxTrader in FY ''23 versus FY '22 contributed 2.2 percentage points to this increase. So that's the extra six months, right? The annualization impact. And if we take that out, expenses would have grown 5.5%. And where all this expense growth comes from? Staff costs which is about 45% of our cost base increased 10%. We saw higher staff cost from the merit increment, salary adjustments and also increase in the Group headcount.
Technology expenses was up about 8%, primarily from the full year consolidation of MaxxTrader and a higher datacenter utilities costs. Royalties, not surprising rose to about 5.5%, mainly due to the higher iron ore futures volume. Other expenses similarly grew about 4.5%, as we resume business travel and higher marketing activities.
Now looking ahead FY '24, both for expense and CapEx, clearly, we will continue to strike the balance between investing to grow our businesses and maintaining the cost discipline. So we expect expenses in FY '24 to increase at a mid-single digit percentage range. This increase will come from higher staff cost. And also investments in growing our OTC FX business.
For CapEx in FY '23 we came in just under SGD60 million or SGD59 million, lower than the initially guided range of SGD70 million to SGD75 million. This was mainly due to deferment of about SGD8 million worth our projects which was planned for FY '23. We will now defer it to FY '24, and as a result the guidance for next year looks higher, it is at SGD75 million to SGD80 million. But if you average that out over the FY '23 and '24 it will be around SGD70 million. So the CapEx again is to grow our OTC FX business, strengthened system resilience and architecture, and also consolidate our office space.
Our balance sheet continues to be robust, absolute debt levels have declined, following the repayment of our bank loans, leverage ratio very healthy 1.1 times on a gross debt to EBITDA metric basis. Interest coverage ratio is more than 100 times. So the Board of Directors has proposed a final quarterly dividend of 8.5 cents per share. So if approved at our upcoming AGM in October, this would represent an annualized increase of 6.3%.
And with that, let me now hand over to Boon Chye, our CEO who will deliver our business update.
Thank you, Yao Loong. A very good morning, everyone. Also thank you for joining us this morning. As you've just heard from Yao Loong, overall, we have delivered another set of resilient results this financial year. Our multi-asset strategy continues to provide market participants with the diverse investment and risk management tools, that they need in this challenging macro environment. This is reflected in our diversified revenue streams, with strong performance, as we've heard in our derivatives businesses, across equities, commodities, and FX, amid lower activity in our cash, equities and index businesses.
Let me start off by reiterating the prime position that SGX Group is in, which is Asia. The global economy is expected to remain challenging with elevated interest rates, inflation, sluggish demand and geopolitical tensions weighing on global trade. Against this backdrop, Asia remains a bright spot for global investors. China and India together are forecasted to generate about half of global growth this year.
Southeast Asian countries are projected to remain resilient in the second half of the year, on account of the continued recovery in domestic and tourism demand. SGX Group is playing to our strengths in this environment. Our multi-asset strategy has enabled us to firmly establish ourselves as the trusted Pan Asian hub for global investors to invest, manage and manage -- and manage risk and raise capital.
In the last financial year, we continued to demonstrate our leadership in Asian derivatives, across asset classes globally. I would now illustrate this with a few examples. Our commodity franchise has yet another milestone year. Volumes in the commodity derivatives increased over 35%, to a record 41 million contracts on the back of a 40% growth in iron ore derivatives volume. Our efforts to expand the ecosystem, to reach more financial participants, such as asset managers and hedge funds has borne fruit, as iron ore has gained global significance as a proxy for Asia's growth.
The proportion of screen trading has also doubled in the past two years, as a result of expanded participation during the European and U.S. trading hours. This is demonstrated in the growth of our T+1 session, which is now at about 18% of the total trading volume. With increased financialization of iron ore contracts, our trading volumes are now more than twice the size of the underlying seaborne physical market, which is a record high. You can see from the slide on the right hand side for FY '2021, there was just over time, today it is now twice the underlying seaborne physical market.
Our flagship commodity contracts, such as iron ore and rubber serve as bellwether for Asian economies, which are rapidly growing and urbanizing. Transport is another core pillar of our Company -- commodities business, as part of price discovery for seaborne commodities, remain the largest clearing venue for dry FFAs. And with both these exchange expertise, we have now expanded into different transport segments, such as containers and air freight.
Moving onto our FX franchise, SGX FX has grown significantly in the last few years. We started with just six FX futures contracts 10 years ago, since then our shelf of FX products has grown six times. Today, we are the largest, and most liquid venue for Asian currency derivatives, besides our leadership in CNH and INR contracts. We've also established new foothold in Korean won, Taiwan dollar, and Thai baht futures.
In FY 2023 we achieved record volumes in notional terms of over $2.5 trillion, this is up almost 56% from a year ago. SGX FX remains the go-to-venue for currencies, especially during volatile markets, with regulatory developments, such as uncleared margin rules coming into full force. Global investors are driving more OTC trading through on exchange central clearing to enhance margin efficiency.
We're also seeing positive traction in our OTC FX volumes across both G10 and Asian currencies. As you've heard, our OTC FX volumes achieved a daily record ADV of $76 billion in the financial year. And we'll achieve our target of SGD100 billion ADV by FY 2025 or earlier. Looking at FX in totality, we're making good progress in achieving our vision of an integrated FX marketplace. SGX FX has become Asia's leading and most comprehensive venue for the risk management and trading of major currencies across FX instruments.
We are well placed to offer holistic and innovative FX offerings on a global scale, in both workflow and trading solutions. This integrated venue that we're building provides a solid foundation for our FX franchise future growth. On equity derivatives business, it continues to be resilient. In FY 2023 we maintain our position as the most liquid neutral venue for major Asian equity derivatives in a fast growing region. Trading in our A50 and Nifty contracts remain strong, as we cemented our position as the primary venue for international investors accessing China and India.
For the Nifty, we successfully migrated our contracts to the GIFT Connect and kick-started with an open interest of around $9 billion. This paves the way for both SGX Group and NSE to deepen our collaboration to drive mutual success and to capture more growth opportunities. We continue to work closely with our members, to increase trading activity in the GIFT Connect. There was also positive momentum and growth of liquidity in other key Asian contracts.
The trading volume and market share of our FTSE Taiwan futures contract continue to grow. We will leverage the momentum, together with the recent launch of SGX FTSE Taiwan features to deepen our Taiwan derivatives franchise this coming year. Further, the MSCI Singapore contract saw heightened volume from greater volatility and increased adoption.
In the past two years, we have accelerated our efforts to expand our sustainability-linked derivatives, to capitalize on evolving investment mandates. Estimates indicate that more than one-third of all equity capital is passive. This mix benchmarks a powerful for climate transition.
Earlier in June, we launched the first global shelf of futures tracking the MSCI Climate Action Index, covering five geographies were Europe, U.S., Asia ex Japan and Japan. The index facilitates real will decarbonization through a sector diversified bottom up and forward-looking approach. We are building a new global ecosystem around climate action indices and plan to include ETFs in the near future.
Our climate action derivatives complement our existing sustainability linked derivatives shelf. As investors allocate more capital to transition finance, they will need similar tools, like the ones that they are used to. For example, our SGX FTSE Blossom Japan Index futures, which allows investors to access Japanese companies with strong ESG practices continue to grow steadily. In addition, we have added a climate option to our Nikkei 225 futures contract. The Nikkei 225 Climate Change 1.5 Degrees Target Index futures offer a seamless liquidity option for investors, to enhance exposure to Japanese companies committed to climate transition.
Moving on to the Data, Connectivity and Indices or DCI. Our Data and Connectivity business continues to enjoy stable growth. Our Connectivity business grew from offering more value-added services to existing clients, and new GIFT related colocation and network services. Our Market Data business grew due to an increase in non-display usage licenses and distribution of commodities data. This growth was slightly offset by lower revenues from our Index business.
We continue to believe that the index industry remains an attractive sector and are therefore, committed to capitalizing on our differentiated strengths in indexing to strengthen the business. Notably Scientific Beta's research expertise and IP creation remains a key lever in building cutting edge risk management index solutions. A case in point is Scientific Beta's Climate Impact solution which ensures a robust decarbonization approach.
Notwithstanding the current macro environment, we believe there are still opportunities for smart beta indices to help investors diversify and balance their portfolios. In the past year SGX Index Edge has stepped up efforts in co-creating indices with a large focus on sustainability. There has also been an increase in adoption of our iEdge indices in partnership with leading structured products issuers in Europe.
Partnership remains an important aspect of the index ecosystem, and will be a focus for our index business, as we look to raise commercial and realize these opportunities. We focus on creating growth and scale through partnerships with customers, data providers, and distribution channels. So putting all our assets together, as one single business and ecosystem, we are advancing from a position of strength, as Asia's leading global exchange. Asia is at the center of global economic growth and SGX Group is at the heart of international capital flows to this part of the world.
To pursue growth further, we're scaling our multi asset offerings globally, through our network, our partnerships and geographical expansion, our client coverage, where we have done well, we will enlarge and consolidate our position to derive greater network effect, where we have room to do better, we are pushed towards better performance. We've made good headway in becoming a global transition finance up in Asia and we'll continue to strengthen our position as a thought leader in this space, and build up our portfolio of sustainable and transition finance solutions across asset classes.
Our aim is to achieve high single-digit revenue growth, while keeping our expense growth in the mid-single digit range. So as to reward shareholders with a mid-single digit percentage increase in our dividend per share over the medium term. I hope you're as positive as I am about SGX Group's prospects.
With this, thank you for your attention, and we'll be happy to take your questions. Thank you.
Okay. Thank you, SGX team and well done on a solid result, given the backdrop. Couple of questions from me, just wanted to have an update on the IPO pipeline, if there's any signs of any turnaround in the securities market. And just secondly more of a mechanical question on the expenses guidance. I understand that we will no longer have the royalty expense for the GIFT partnership. So just wanted to understand if it's an equal and offsetting sort of number versus revenues, and if that's really factored into the expense guidance, I think, because you have like a mid-single digit expense view for the next couple of years. Those are the first two questions if I can.
Yeah, I'll take the second question first. You're right Jayden, so our FY '24 expense has taken into account the impact of not having to pay that Nifty royalties, yeah. So that is covered in the mid-single digit expense range.
So on the yeah, IPO pipeline, I guess hazy crystal ball, but we've had a hazy crystal ball for I guess the last year and a half pretty unprecedented environment where essentially the IPO market has been shut globally for new issuance activity. And I think I'm going to say pretty much the same as what I said at this time six months ago, that for the near term it still looks difficult, but we're seeing some early signs of global activity resuming.
And frankly, I think we're going to see that first and foremost with some of the highest quality issuers, perhaps also more in the developed markets. But having said that, it keeps me cautiously optimistic for I guess the medium term. And if we look at 2024 -- calendar year 2024 that is after a year and a half pent up supply building up, Company still need to grow.
A lot of companies that have been privately capitalized for a long period of time now are going to need liquidity for their shareholders. We continue to have very good dialogues with issuers from the region, and we believe that activity will pick up as we see the momentum kick off within gradually improving environment. Rates outlook has stabilized a bit, valuations have increased over the last couple of months, important for confidence, and so hopefully with that we're going to see in the next period activity on a global level and also here in Singapore, Brazil.
Thank you.
Next [indiscernible] yeah.
Hi. Good morning. Thanks for the presentation. This is Yong Hong from Citi. So maybe just following up on Jayden's question and just to be more direct. So following that Nifty contract migration, what is the impact to your bottom line? From your money statistics, what can we expect changes to your DDAV for example. Thank you.
So one calendar month into full scale operations. The reason we embarked on this journey, I mean there's a constancy to what we do across this waterfront. Everything that Boon Chye presented wasn't done in one day, this has been done over 30 years. There's a constancy to the way that we have approached, the need for the clients to access the Asian capital structure.
Again as Boon Chye alluded to, right, in 10 years’ time four of the world's five largest economies are right here, it's India, it's China it's Indonesia it's Japan. So that is covered in our derivatives waterfront and the move that we have taken in India is to say that because the opportunity was there to work with this partner NSE to build this Connect. The clever and opportunistic way to do this is to do it as we have done, which is to move our clients into a joint liquidity pool with the NSE, where they are already the world's largest derivatives exchange.
We're trying to create value, by bringing their liquidity pool together with our liquidity pool. So I am confident, I think our cadence is good, and our visibility is clear that with the delivery of full scale operations we will see more than we used to see. It starts with more participants, it moves onto more products, there are now eight products on the Connect. And of course, as you've seen in China, we've done the full waterfront iron ore, CNH, A50, H50, Climate Action, of course, our ambitions to go that way as India's capital structure also evolves. Right?
But there's a constancy to the way we do this, which is you have to come with us on this journey, that everything we execute creates incremental network value, portfolio value with the customers. And I think it's underlined with the confidence that the customers carried with us. We've done such migrations or liquidity switches a couple of times.
So when we went into Taiwan, MSCI to FTSE, maybe people asked a lot of questions about, are you sure you can do this. I think as we approach this particular migration, I mean, you can ask your internal clients to, right? The general feedback is, we'll go with you because you've done it before. We understand the journey, and we have the special blessing that tailwind of India capital markets is very, very strong, right. So I hope that's a complete answer to your question.
Yeah. Thanks for that. Just one more question. I think on your treasury income, I think that is way ahead of what we were modeling, and how sustainable that is, given that I think Hong Kong EX for example, they've been cutting down debt. So how should we expect that going forward.
Yeah. For that SGD1 million forecast…
On interest rate…
Yeah. I don't know, I mean Paul had a hard time to forecast IPO and I cannot do different. Look I think the -- for the last 12 months the rate hike has been quite unprecedented, the pace at which you went from particularly zero to just over 5%. We don't think -- I mean the market doesn't think that we're going to see a repeat of that cycle. I think market is in fact, whether they are ahead of themselves, do expect to see some form of cuts in '24.
So these things are exogenous. We will have to deal with it as they come. What we can do is to continue to drive our derivatives business. There is a new impact and there is a collateral balance right? So as we do more business and customers leave more overnight interest with us, that's where we can drive the growth of our business, and then the associated treasury income. The use will come up, they will be -- they will be up be, they will be down and we'll manage it along the way. Priority still is to make sure that customer collateral money is safe when they part, their open interest with us they have to risk manage and we mixture that collateral part with us is in the safest way that we can do so.
And just one, can you guys hear me?
Yeah.
Yeah.
To your right. Hi, Thilan from Maybank. Just a couple of questions. One is on your derivative fees, we saw it improving this half. Can you give us a little bit of color on how you're thinking about the outlook for that. I mean how much more can you kind of squeeze out from the client mix there. Are there any more sort of discounts and things like that that are still in there and how should we think about that going into the first half? And my second question is on your Cash Equities business, you got the high ADRs that have been put in place. How are you kind of thinking about the success of that and how are you thinking about the sort of pipeline of new products there coming through? Thank you.
So on the first, I think I want to emphasize as we have done before that, we don't drive this as a specific outcome. The realized return per contract is a consequence of client mix and volume mix, and importantly product mix. So if you've seen the more successful growth products are iron ore, which is naturally a premium priced product. So that is one primary driver.
The other one also is that if you look at the equity derivatives franchise, it was a slightly lower volatility environment, which tends to mean that our short horizon traders did a little less, but our long horizon customers did a little more, and those guys again are naturally more premium paying customers. So it's the custom mix and the product mix that's approximate driver.
And I think you have to feel comfortable that there is a natural elasticity that when volume appears to come down a little, premium pricing appears, right? So there is a natural elasticity to the franchise that says that, as volume goes up, there is a rebalancing because there is a natural return to customers who need to trade more, but they tend to keep less overnight interest with us. So that's a sign of a healthy multiproduct franchise.
With respect to the depository receipts, it is part of a program that we're trying to think through for the cash market to say what were some of the things, and some of the lessons that we may have learned in the DC franchise, that we could usefully apply to in a securities format. So you'll probably see that across the board, we're trying to productize a little more, which means that we bring instruments which are of interest in a securities format, which covers the Pan Asian waterfront, so this covers things from DLCs to structured certificates, which are coming up with a very wide range of ETFs.
Now SDRs are very interesting because they are in our context backed by statute, meaning they're recognized in the Securities and Futures Act as a thing where they previously weren't. So the body of work begins with making sure that the stack, the regulatory stack technology stack, the customers stack that supports the DR framework in Singapore is well entrenched.
The second step therefore is to work with a partner, where there is the potential for value creation. Our stock trading in their market, their stock trading in our market. This we hope is the beginning of some kind of federation of exchanges in Asia, where the win-win outcome is very clear. As you know, a lot of the challenges in working through collaboration is share of pie versus size of pie. We believe that with this format it is 100% clear that when the pie grows, there is no need to fight over the pies.
So for example, as Thai companies are brought into our market from Thai baht into Sing dollars, the U.S. dollars, distributed through our customer network, this is natural value accretion, because we have completely segmented networks. It's capital control there, it's a DM here. So if we create value and we create -- and they create value when hopefully in the coming year we bring some Singapore shares into the Thai market.
With that useful example, we think we can create a -- hopefully this is forward-looking, a federation of interested partners. And the market structure of our parts of the world isn't going to change anytime soon. Capital controls, local currencies, EM versus DM, for a long time to come we'll be the only DM in this region. So we think there's a natural value to be created. But the plumbing needs to be put in place. And we think the STRs are very good way to start. 12 months ago we would have called it a token because that's precisely what it is. is as token recognizing statute but we'll call it an STR.
Thank you.
Dominic, any questions from the webcast audience.
So yes, just one question from Paul Chew from Phillip Securities. It's on our OTC FX business, in order to hit $100 billion ADV, what are the key drivers apart from market conditions?
Yeah. We are excited about the long-term prospect for foreign exchange we did in SGX Group. I think Boon Chye shared, I think two external driven secular trend in the medium term, I think one piece is within Asia itself, we are a growth region and we will continue to be a growth region. When we look at the positioning, clearly SGX FX is a global service. We have clients throughout the world. But we are the biggest platform when it comes to Asian currency. So one, our dominance, for our OTC FX technologies franchise within the Asian, within solving e-liquidity challenges for clients accessing the region is going to position us well, as Asia continues to grow.
Two we think that, we are in a secular trend around more digitalization. We are seeing more clients across buyside and sell side clients, looking at more solutions to digitalize. And more recently I think the hype now is AI automation. And within that, when you think about what is the criteria of foundation for you to automate, to use all the technology that's out there, are the new language model that you can apply to different client service that you have. Right?
The fundamental building block is a solid partner, robust partner for you to digitalize, right? How information is transferred, and how you send orders and how you execute efficiently. So the technology platform that we have built up over the years. The FX on buy side, MaxxTrader on the sell side is going to give us a very strong foundation, as the industry looks towards more digitalization, more automation, and having a partner with a global network to help them engage the rest of their global next clients in a more efficient way.
So I will see that that, that clearly there'll be a external secular tailwind for us. But more importantly I think within the franchise, Yao Loong briefly mentioned that, first half last year compared to first half this year, I think second half this year I think we have accelerated the growth. Part of the reason is that, I think we had a 12 to 18 months migration process, where we're moving the FX up into a new infrastructure. What we have also done is that we have also upgraded the BFX system with new functionality, and on the new region of five more assessable client trading platform.
So a lot of that investment I would say that we have done, for both bit and mix around technology that we have done in the last 12, 18 months I think there for us. And we'll continue to invest in this very exciting vertical.
Harsh?
Thanks for the presentation. I had three questions, Boon Chye if I may. First one is the guidance on cost and revenue growth over the next few years. Medium term, mid-single digit cost growth, high single digit revenue growth. Now one of the big tailwinds in last 12 months have been rates. So as rates normalize, whenever it does, '24 FY '24, FY '25, have you factored that in your guidance of high single digit revenue growth? Or can there be a period whenever the treasury income normalizes, that you may probably not get that kind of revenue growth in next couple of years?
In projecting that associated treasury income, we are not in the business of forecasting forward so generally we will see what the market consensus is out there, in terms of the fall out rates, and just use that as assumption in our planning parameter when we do some of this projections that we have shared, we view in the end market.
Right. So on that, if I look at the fed fund futures being priced in about couple of hundred bps of rate cut same time next year, that's already factored in your high single digit revenue growth guidance?
Well, when we look at our medium term plan, it all centers around our initiatives, right, our portfolio of asset classes. The vision that we are doing well, where we want to now penetrate further upsell, regions where we can really expand more. And then obviously gaps in our products fill the shelf I talk about transition finance like one-third of equity capital is passive. We are now on the preferred venue for Asian equity derivatives, investors would need similar tools. So those are medium term pathways that we plan. And as Yao Loong said, yes there will then be assumptions on growth of how we see in our underlying businesses, and the associated margins and what the forward markets are pricing in.
Right. So then I should think of the guidance as more bottom up business guidance and the treasury income goes up or down that will be a fluctuation. Okay. Great. Second question is around your debt to EBITDA 1.1 times, it was 1.2, it has improved. You have in the past stated ambitions to use organic and inorganic means to broaden the franchise, you have done lot of deals in the last five, seven years. What is the max debt to EBITDA you think you can get to in -- and what is the timeline that you're thinking about getting there and some of the gaps you've talked about in your portfolio, what are those gaps? I think even trying to figure out what can you buy and when can you buy and how large is that acquisition although series of acquisitions? Any guidance around that will be very useful.
Well, something that is not visible today maybe visible tomorrow. Something there visible today may be less relevant tomorrow. But let me try and answer your question, Harsh. I think what is important is, we have a very strong foundation I think in our portfolio of multi-asset today. I mean if you look at the environment that we operate through, and how we have delivered a resilient set of results. And with Asia being the center of global growth, multi asset platform up here is our strategy continuously and going forward.
First, we will improve on it through geography partnership networks and clients. Two, as I said before, I think fixed income is still a market that is important. It does not necessarily mean we will have to acquire. I think we've shown a history of being a good partner, might talk about share of pie, which is a size of pie, grew that pie, I think both sides will win. As to -- as and when which I think the underlying importance is that's an asset really fit into our strategy. And if it does, that is incumbent upon us, to put through the lens of our investment framework, and be able to explain to our stakeholders, including shareholders, even if this would be debt funded. And I think that's the way we'll look at this.
So I wouldn't want to really focus around the boundaries of the leverage. And that will also be guided by, obviously having a very strong and robust clearing house. And the same time, we have now laid out also the way we want to think about rewarding shareholders as our business grow.
I'll come to the shareholder reward in a minute. But previously you talked about I think there was some discussion around 2x debt to EBITDA has being kind of upper limit, is that fair to think about 1.5x to 2x that you can get there in terms of acquisitions? And the reason I'm asking that Boon Chye is, because interest rates today are very different from 12 months ago. So your funding cost and your hurdle rate would have kind of meaningfully gone up. So, can you actually do an acquisition which is accretive today, debt funded, given the delta and rates? Or would you rather just focus more on organic and partnership kind of thing? And like what is the max you can go to in terms of --
As you pointed actually the cost of money pooler has gone up, and what that means is, any asset that we're looking at the hurdle rate has probably clearly gone up. And that may mean that the expected fit and returns that we've put the assets through, the analyzing lens will be much, much in greater detail. So maybe that number comes down, right, 1.5 times or 2 times may come down, because just interest is clearly one factor that you think about in looking at acquisition.
And also, I will reiterate that if you look at the businesses that we have today, it's much stronger than what we will achieve our years ago. Right. And there is already a lot to build upon. And as I said, where we are strong and leading, we really want to derive greater network effects. And where there are rooms to improve, then we really make sure to identify those gaps and work on it.
Right. Thanks for that. This brings me to the final question, on the dividend per share went up 6% odd, your guidance is for mid-single digit. I'm assuming it means SGD0.05 per quarter increase every year for next few years, is that a fair way of thinking about it?
I would like to look a bit in the medium term and now, automatically changed every quarter. I think we want to signal to our shareholder, as our businesses grow, over medium term, and you asked me, how do we define medium-term, right? Short term is less than two years. We look at longer beyond five. So over that kind of period, we want to make sure that, as our businesses grow, we realize shareholders with mid-single digit kind of dividend growth rate.
Right. So if I kind of put all of the things that you said together, the cost of fund has gone up, so you may not necessarily now look at like 1.5x to 2x debt to EBITDA. You may still get there if there is a really good deal, but that's not we are looking for. And hence you are retaining more cash so that in case there is an acquisition, you don't have to take as much debt. Is that a way of thinking about it, because I would have imagine with such a fantastic performance, even core business up 15%, with one-offs it is better, that you may have paid a bit more. And today there is a negative spread between the dividend yields I'm getting at SGX versus the Singapore risk free in three month interbank rate.
So it's very tough too, and that's what the stock price is telling us this morning, despite a fantastic set of results, it's trading water at best. So shareholders are clearly saying that they want more payout, but it seems that what you are guiding for is way more measured pace of DPS increase. So how do we kind of bridge that gap?
No, I think shareholders clearly would like to be rewarded with dividends, that's clear, and that's one of the important considerations that we would have. But we also think that shareholders would like our businesses still grow. And part of the way to look at this is, you can either basis, don't forget, we're in evolving environment, so we could either pay down debt. We could either retain some cash to invest organically, because there are still opportunities that we see, right, geographies, people, all, as and when if there are assets that come through that makes sense, we may acquire.
And which is why we want to think of this at least on the medium term. And as things evolve, these had different levers that we will try and balance and maybe we written more capital if there's no need for that. All -- we use those capital according to how we see the best return for the businesses and to grow it, and yet rewarding our shareholders a dividend growth.
Got it. Thank you.
So I've got several questions from Goldman Sachs, Gurpreet, based in Hong Kong. Three questions, the first one is how much more penetration from iron ore from the two times physical market can you go, given equities peak around three to four times? Second question is margin balances, how have they grown or how they been so far? And the third question, can you elaborate more on the impairment of Scientific Beta's acquisition.
Can you repeat that question?
Elaborate on the impairment on SB acquisition.
I'll take the first two questions. So margin balances, I'm just comparing FY '23, '22. You have seen that DAV more or less was SGD1 million lot, so margin balances have been largely flat year-on-year. Composition wise, there has been changes, as clearing members, customers decide how to optimize their collateral portfolio. So that is a customer decision. We provide a variety of currencies, and different sorts of cash to non-cash collateral for them to decide how best to collateralize their position. So overall margin balance is flat, composition some changes.
Maybe to touch on that also to -- and again to reemphasize, the drivers that Boon Chye had mentioned on margin, don't forget that we went through a period where volatility was high. So margin charged was also -- that fluctuates too. So a large part of the driver of what we do is, how much do customers keep with us, how much margin per lot, do I have to charge and that then makes up the master pool, right. So what I would say is that the underlying open interest in terms of futures contracts kept with us has been very, very strong.
On the Scientific Beta impairment of the purchased intangibles. So this intangible asset as a result of the acquisition back in FY 2020 under the accounting rules, we're allowed to capitalize these assets. And then, as part of the accounting rules, we will then amortize them over a period of time. Over several years. So that clearly the intangible assets at a point when it wasn't valued would have been based on the DCF way of looking at the value, right, project the cash flows.
So as we have explained that, overall the index business where the factors, the asset tracking factors have led -- kept weighted technology led and Indices assets in that business and their application have fallen. So as a result, the intangible assets relating around know-how customer when we look the cash flows or the DCF going forward it has been weaker. And so overall, the difference in value will be taken as impairments.
It is a non-cash charge. I will say that, under normal circumstances where we would have done it, we would have amortized this over a period of time, whether it's seven, eight, nine years. It would have gone down to zero because it's purchased intangibles, right. But we decided for prudence, we will do it. But as I said, it is a non-cash charge, nothing has happened in that sense. So it's an accounting from the acquisition, comparing the cash flows and then taking a non-cash impairment. And as I said we would have amortized debt to zero over time.
Iron ore last question for opening up.
Yeah. On iron ore, I think, while there will be always be uncertainty around near-term performance, when I look at the medium long-term opportunity of iron ore, we see significant upside. I think one more, just on the physical market. Asia will continue to drive global growth. Asia is a stage of development where a big part of the growth will also be driven by a balance vision to construction, infrastructure building.
So within that, I think on the physical market, especially SGX, iron ore as the global seaborne benchmark. I think on the physical side on the medium, long-term as the region globalize, I think the demand on the physical base, right, will continue to grow. Over the last few years, and I think partially demonstrated by I think some of the numbers that Boon Chye showed, we have invested very significantly around, providing the market structure, one, to enable, I think better understanding of the iron ore market, the micro structure, we have worked with research partner, we've worked with major investment banks, commodities, research, around how we can allow people to understand the commodities asset class.
On market structure side, we continue, we -- for example to improve market structure, we've taken the tick size which then allows the market, basically for -- to basically trade at tighter take. And we have also created a segment window a year and a half ago. And I think in the forward, we will continue I think to look at how we can improve the market structure, for example, providing more information around trader positioning. Something that is more commend outside the region so something we are doing first half of next year.
And I would say that, when we then contrast that against, I think the correlation that we have, where I think when you see increase in screen, together we increase in volume, we see that it's complementary where -- when the screen percentage of transaction improve. And especially the absolute liquidity that you get on screen improve the market efficiency of the overall iron ore market.
So we do think that, as we have more financial player coming in, where we drive more demand around screen transactions, when there is more transparency, which then together with the improving market structure reduce the cost of access, improve market velocity, and to ask there is a lot more headroom, when we think about how much more as a percentage of physical this can go. When we think about the major other more financialized commodity asset classes that's out there, right. And you have oil, you have coal, and if you look at the commodity asset classes two times is actually relatively low multiple compared to those.
So the focus for us is, I think, one again on the physical side we are bullish, right. This is commodities that power Asia growth. I think we are bullish that we will continue to be relevant and there'll be a physical growth around that in the mid and long-term. But more importantly on financialization, I think as we improve the market structure, there will be a good tailwind that we will enjoy it, as we continue to work with participant to improve the market.
Before we draw this to a close, any last questions from anyone? Wow, okay. Maybe on the back there.
Hi. Thank you. I'm Andrea from CGS-CIMB. Just a follow up on the Nifty product. So with a shift of Nifty to the GIFT Exchange, in terms of the revenue share between SGX and the NSE, I do understand that there's a difference in how the revenue is split, depending on where the transaction originates from. Can you give us some color on where the most of the transactions now? Are they still being driven from the SGX side of things, and how you see the split changing over time? And if this splits more materially, meaning that more transactions come from the GIFT from the NSE side, are we expecting to see a larger change in that pro forma clearing fee more than 3% that you have presented?
So let me address the second part, because that is about the size of pie. The first one is a share of pie question, which is for the purpose of this connect is genuinely not interesting, right, which is if they grow by 1,000 times and we grew by 1,000 times overall we're indifferent to the fact that our growth rate was the same. So the key is that, we grow our origin grows, but they grow their origin grows. And these two pools of liquidity interact because that's what creates extra business.
As of today, six weeks into the cut over, the majority of the transactions originate from SGX, because that is this phase of the migration. It's our customers, our clearing members are bringing that pool over. The next phase, we fully anticipate to see more direct trading, more higher velocity trading. Right? So that is what we are working for. We have strong visibility as to how we achieve this. And that's Phase 2 of what we're doing at the full scale operations.
Okay. Thank you.
Yes, go ahead. Sorry, we can't hear you.
Hi Tabitha from DBS. I just have one question. How should we think about the step up of dividends versus paying down the outstanding debt that SGX has taken on to finance the various acquisitions. Is there a medium term target of where the debt equity should be? And what is the refinancing cost step up of the SGD350 million of current borrowings?
So we are comfortable operating in the current environment. I think our leverage ratio is very low. And more importantly, our interest coverage ratio is something that we don't talk about is also healthy. So as funding costs go up, clearly, this is something we look at. In terms of the -- you're referring to the convertible bond that is due in March, we will clearly take a decision as to whether we refinance the whole thing or do partial paydown and things like that. So debt decision we have stressed it, and compared to the -- what we have shared today in terms of medium term dividend growth. That clearly we have the ability to do that, independently of our decision to refinance a comfortable bond. As for how much it will cost, we will see when we get to that point.
Okay. The last one is, Jayden for you. Yeah, just wait, we've got a mic, yeah.
Yeah. Thank you. Just wanted to follow up on the Scientific Beta. Can you share any further color on how much the assets under replication have declined? And then just coming back to the points that Harsh raised around M&A, I mean the M&A for FX is clearly going very well. But this one, it doesn't seem to have lived up to the initial expectations. What sort of learnings do you sort of take from this when you're looking at further opportunities?
Yeah. We have not disclosed the assets under replication for Scientific Beta. Yeah.
But -- so we don't disclose the AUM. But if we go through the last, broadly speaking, last two years is really a tech driven cap weighted kind of market, the Magnificent Seven, right. So there is that tilt towards that. But I think the interesting bit is, factors remain relevant. But you always obviously have a relative comparison. What we've done is also to strengthen the offerings, so the climate impact indices that we've done, and obviously in terms of coverage. So nothing the -- then we talk about high interest rates value coming back so these are all a bit cyclical.
All right. Thank you very much. Thank you for being here, and participating in our results briefing. Have a good day.