This article first appeared in The Edge Financial Daily on April 18, 2018

Bursa Malaysia Bhd
(April 17, RM7.45)
Maintain hold with a fair value (FV) of RM7.50: We raise our FV on Bursa Malaysia Bhd to RM7.50 per share from RM6.90 after the completion of its bonus issue by rolling over our valuation to financial year 2019 (FY19) based on a price-earnings ratio (PER) of 24 times (five-year historical average PER). While we remain positive on the local equity market, we continue to see the stock trading at a higher valuation (23.4 times PER), compared to the stock exchanges of Singapore of 20.1 times PER and Australia of 22.5 times PER. Hence, we maintain our “hold” recommendation. We make no changes to our earnings estimates.

Bursa has completed its bonus issue of one bonus share for every two existing shares held, resulting in an issuance of 268.7 million bonus shares. This has enlarged its number of shares from 537.5 million to 806.3 million shares. Our estimates have already taken into account the enlarged number of shares.

Bursa is scheduled to release its first quarter of FY18 (1QFY18) results on April 25. We expect Bursa’s 1QFY18 to come in between RM59 million and RM60 million (8.3% quarter-on-quarter [q-o-q]; 5.8% year-on-year [y-o-y]). This will be higher than the RM55.3 million reported in 4QFY17 and RM56.6 million in 1QFY17. The stronger 1QFY18 earnings are based on a higher daily average trading value (DATV) for equities with a strong inflow of foreign funds to the securities market in 1QFY18. Meanwhile, trading revenue for derivatives in 1QFY18 is expected to be softer q-o-q with higher average daily contracts (ADC) traded for crude palm oil futures (FCPO) offset by a lower ADC for the FBM KLCI futures (FKLI).

For 1QFY18, DATV (on-market trade) for equities rose to RM2.71 billion versus RM2.32 billion in 4QFY17 and RM1.95 billion in 1QFY17. By month, in February and March 2018, it tapered to RM2.67 billion and RM2.3 billion respectively from a high of RM3.2 billion in January 2018. We estimate the market velocity for 1QFY18 to be higher at 34.7% versus 30.8% in 4QFY17. Market turnover (velocity) was lower in February and March, compared with January 2018.

Year to date, foreign fund flows to equities have still been positive, cumulating up to RM2.8 billion as of April 11, 2018. On a monthly basis, foreign fund inflows in March and February 2018 were RM63.7 million and RM1.1 billion respectively, reflecting net selling of equities by foreign investors. This was in contrast to a strong positive inflow of foreign funds of RM3.4 billion to the local equity market in January 2018 and RM959 million in December 2017.

For 1QFY18, we expect the ADC traded for the FKLI, which attracts higher trade fees compared to FCPO, to be lower q-o-q. Meanwhile, the ADC traded for FCPO is expected to rise in 1QFY18 compared with 4QFY17. Overall, we anticipate the ADC traded for derivatives (FKLI, FCPO and others) to slip q-o-q. We saw increased volatility based on the VIX Index reading (a proxy for market volatility), which has risen to 20.24 from 9.77 at the start of 2018.

We keep our 2018 FBM KLCI target of 1,900 points, while for 2019, we have a year-end target of 2,040. This is supported by an earnings growth of 6.8% and 7.3% for the FBM KLCI on the back of projected GDP growth of 5.5% and 5.3% respectively for 2018 and 2019. This is at one times multiple premium to the five-year historical average of about 17 times, largely to reflect the cyclical upturn in corporate earnings growth.

In our projected earnings for Bursa, we have factored in an improvement in DATV for equities to RM2.5 billion (8% y-o-y) and RM2.65 billion (6% y-o-y) for FY18 and FY19 respectively. We maintain our DATV assumptions for the securities market for now. — AmInvestment Bank, April 17