This article first appeared in The Edge Financial Daily, on April 27, 2016.
Bursa Malaysia Bhd
(April 26, RM 8.61)
Maintain hold with a target price (TP) of RM8.44: Bursa Malaysia Bhd’s first financial quarter ended March 31, 2016 (1QFY16) net profit was below expectations, at only 23% of our full-year forecast and consensus. This was mainly attributable to the weaker-than-expected revenue for both equity and derivative income. As per norm, there was no dividend declared in 1QFY16. The company’s net profit advanced by 5.9% year-on-year (y-o-y) in 1QFY16 on the back of a 5.4% rise in revenue.
Malaysia’s equity market average daily trading value fell by 4.8% y-o-y to RM1.98 billion in 1QFY16 because of: i) decline in market velocity from 30% in 1QFY15 to 29% in 1QFY16; and ii) 1.7% y-o-y drop in market capitalisation to RM1.71 trillion as at end-March. The above were partly offset by the increase in effective clearing fee rate from 2.31% a year ago to 2.38% in 1QFY16. Overall, Bursa’s 1QFY16 equity trading income contracted marginally by 0.7% y-o-y to RM57.1 million.
The derivative business turned in a better performance with a 9.6% y-o-y increase in income to RM22.5 million. This was mainly driven by higher guarantee and collateral management fees from a low base in 1QFY15. However, it was a negative surprise that the number of average daily contracts fell by 4.1% y-o-y to 57,900 in 1QFY16.
In 1QFY16, equity income was still the biggest contributor to Bursa’s total revenue, although its contribution dropped from 48% a year ago to 45.3% in 1QFY16. On the other hand, the share of derivative income as a percentage of Bursa’s total revenue increased from 17.1% in 1QFY15 to 17.8% in 1QFY16
The weaker-than-expected 1QFY16 results prompt us to cut our FY16 to FY18 ending Dec 31 net profit forecast by about 2.5%, as we reduce our revenue forecast by 2.8%. This led to a drop in our TP from RM8.66 to RM8.44, still pegged to a target FY17 price-earnings ratio (PER) of 19.4 times, derived from a 10% discount to its five-year average PER of 21.4 times. Although we are bullish on the outlook for the equity market in 2016, Bursa remains a “hold”, given its high valuation of 20.3 times FY17 PER and 5.6 times FY17 price-to-book value. — CIMB Research, April 25