Baltic Exchange offers strategic value, says SGX

Shareholders of The Baltic Exchange approved SGX's £87 million (S$154 million) buyout offer earlier this week, paving the way for the deal to be completed by the end of the year.
Shareholders of The Baltic Exchange approved SGX's £87 million (S$154 million) buyout offer earlier this week, paving the way for the deal to be completed by the end of the year.PHOTO: REUTERS

It believes acquisition will boost exchange's derivatives business

The Singapore Exchange (SGX) believes its acquisition of The Baltic Exchange is a good deal that will boost its derivatives business, even though the price might seem relatively steep.

SGX executives told a briefing yesterday that the acquisition opens up many opportunities, given The Baltic Exchange's range of indices and benchmarks used globally to settle freight contracts and forward freight agreements, a form of derivative used for freight rate hedging.

The firm could create synergy with the SGX by lifting growth in forward freight agreements at a time when hedging is more instrumental to regional commodity trading, given the heightened volatility in freight rates.

SGX derivatives head Michael Syn said: "Last year, when the Chinese yuan was de-pegged, some of our iron ore clients saw their profit from one voyage wiped out in just a one-day currency swing.

"Our job is to inform our clients and make them realise that, while they may not have needed to consider the freight contract risks when iron ore or oil prices were high enough, good risk management or hedging today could mean the difference between being profitable and not."

Mr Syn said having the Baltic Exchange on board will allow SGX to better serve clients in Asian-Pacific and European time zones.

But these strategies may take a while to bear fruit, noted DBS analyst Ling Lee Keng.

"No doubt this deal is positive for the company, but these are long- term changes and the value-add will be mostly on the existing business. I don't see a significant boost to the counter in the near term," she told The Straits Times, maintaining her target price for the SGX at $7.80.

Shareholders of the London- based The Baltic Exchange approved SGX's £87 million (S$154 million) buyout offer earlier this week, paving the way for the deal to be completed by the end of the year.

The buyout, which was announced in February, would be the biggest acquisition by SGX.

Chief executive Loh Boon Chye told the briefing that the price is reasonable, given The Baltic Exchange's strategic value.

"It's always easy to look at it on a price-to-earning (P/E) basis. If you just look at Baltic's net profit of £1 million last year and what we plan to pay, it might look like a high number," he said. The Baltic Exchange reported a profit after tax of £968,570 for its financial year ended March 31.

So adding The Baltic Exchange to the fold "will not materially change" SGX's bottom line, Mr Loh said. SGX reported net profit of $349 million for the 12 months ended June 30.

"But many of these index and data businesses have a high P/E multiple. The key is how it will fit with your other businesses, and (Baltic Exchange) is a very good strategic fit for our commodities business."

The acquisition will be funded entirely out of SGX's cash reserves, he added.

SGX is itself already an important hub for freight and commodity-related derivatives. It holds more than 90 per cent of the market share of iron ore derivatives clearing. This segment was a key driver that helped deliver a 10 per cent growth in the exchange's derivatives revenue to $325.3 million in the last financial year.

It also has a 40 per cent market share in clearing forward freight agreements for dry bulk shipments.

A version of this article appeared in the print edition of The Straits Times on October 01, 2016, with the headline 'Baltic Exchange offers strategic value, says SGX'. Print Edition | Subscribe