Is SGX Overpriced?

Was just wondering if the SGX share is overpriced. As covered in Good Companies vs Good Investments, the SGX is a good company due to its strong balance sheet as well as being the only local bourse, but do these justify its high share price?

(Image source: http://www.eq.com.sg/page/site/public/partners.jsp)

With the strong financial statements that the company has to offer, with no debt, a ROE in excess of 30% as well as stable profits for the last 5 years. The company has also paid out a stable dividend of 27-28 cents to its shareholders for the past 4 years.

But the share seems overpriced for the company as its has a high P/E ratio of over 25. It also has a P/B ratio of almost 10. If we compare the company's returns to Singapore Government bonds over 30-years, the bonds underperform by just 1%, but bear a lot less risk than SGX. If the company underperforms during a decrease in the trading volume(which can occur during recessions or a weakening of investor sentiment in Singapore), its profits would decrease and its returns would be even lower than that for the bonds. Its book value also provide little margin of safety, providing only 10 cents to the dollar should the company go bankrupt. While this seems unlikely, we should also keep this in mind.

While the company has a growing derivatives, I think that this would not grow their bottom line much and their main business will remain in securities trading. The company also has a large cash reserve, more than its liabilities (in 2014) which it may use for further growth and acquisitions, which are possible areas for growth for the company. But, this cash reserve is less than 10% of the market cap of the share and would not make a large impact to the returns to the shareholders anyway.

The company also had a slight decline in profit in 2014, which may be due to the penny stock crash in late-2013, which may have reduced investor confidence. This may improve slightly, but as mentioned earlier, any subsequent decline in trading volume, which may occur during recessions, would definitely lower their (already) low returns relative to government bonds.

The company, while a good company, does not seem to be a good investment as it can barely return the Singapore Government bond yield currently and any future toll on its earnings may even cause it to return less than the Singapore Government bond. It has a very thin margin of error, if you would like to invest in it, to get a return that at least matches that of the Singapore Government bond.

Another company in the same industry would be UOB Kay Hian, which I have covered in UOB Kay Hian - Good Buy with Weakness in Trading Volume?. This may be a better investment than SGX as it is well-diversified into many countries and has a much lower P/E and P/B ratios, while SGX does its main business in Singapore and trades at a high P/E and P/B ratio, which may not be sustainable in the long run as well.

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