LEAP to enhance Bursa revenue

This article first appeared in The Edge Financial Daily, on July 28, 2017.
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Bursa Malaysia Bhd
(July 27, RM10.60)
Maintain neutral with an unchanged target price (TP) of RM11:
Bursa Malaysia Bhd reported profit after tax and minority interests of RM116.2 million for the first half of financial year 2017 (1HFY17), which grew by 16.9% year-on-year (y-o-y). The results came in within our and the consensus estimates at 55.6% and 52.3% of respective full-year estimates. 

The earnings growth was mainly due to an increase in operating revenue of 8.5% y-o-y. Interestingly for 1HFY17, Bursa recorded its best half-year operating revenue since its listing in 2005.

The positive jump in operating revenue was primarily driven by higher trading activities across all segments. Notably, the increase in trading revenue was mainly contributed by domestic trade.

Additionally, the average daily trading value of the securities market via on-market trade was up by 30.8% y-o-y to RM2.5 billion, due to renewed interest from foreign funds and improved market sentiments.

1HFY17 saw a strong inflow of foreign funds at RM10.7 billion, which grew more than 100% y-o-y. The influx of foreign funds into the local market reflected higher investor confidence. 

Based on market capitalisation, it is worth noting that the securities market’s foreign ownership has increased by 0.7 percentage points, from 22.3%.

The company declared interim and special dividends of 20 sen and 15 sen respectively. Excluding the special dividend, the reward was consistent with Bursa’s historical dividend payout ratio of 90%.

A new market for small and medium enterprises (SMEs), which was launched this week, will provide another avenue to raise funds via a more efficient platform. 

Some of the potential issuers include Cloudaron Pte Ltd, Agrofresh International Group Sdn Bhd, Red Ideas Holdings Sdn Bhd and Polymer Link Sdn Bhd, with the first listing expected by end-FY17.

We foresee the new market providing enhancement to Bursa’s revenue, given the high demand and opportunities stemming from the high number of SMEs in the local market.

At this juncture, we believe there will be no impact on earnings from the introduction of the Leading Entrepreneur Accelerator Platform (LEAP), considering that it is still at an early stage. 

Despite the strong activities in securities trading, we view that the trend will taper off in 2HFY17, given that trading volumes have fallen sharply in July 2017. 

Notably, trading values in June and July 2017 have been disappointing, declining by 23% month-on-month (m-o-m) and 22.7% m-o-m respectively.

We maintain our “neutral” call for the stock given the recent decline in trading volume. However, we believe this will be moderated by expectations of continuing economic performance and more market catalysts. 

With no change to our forecasts, our TP remains unchanged at RM11 by pegging FY18 forecast earnings per share to price-earnings ratio of 25 times, which is one standard deviation below of its three-year historical average. — MIDF Research, July 27