Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020

A surge in trading activity in the stock market in recent months, spurred by an increase in the participation of retail investors during the Covid-19 movement restrictions, spells good news for Bursa Malaysia Bhd.

The stock market operator, which derives the bulk of its revenue from securities trades, has seen an upward trend in its share price — it has almost doubled to RM8.40 as at the June 4 closing from a low of RM4.42 on March 19, a day after the Movement Control Order (MCO) began.

At RM8.40, its highest close since February 2008, Bursa had a market capitalisation of RM6.79 billion and was trading at a price-earnings (PE) ratio of about 33 times.

The stock has already far surpassed the target prices set by most analysts in early May following the release of Bursa’s first-quarter financial results. At that point, the highest target price was RM7.87.

Since then, however, the stock market has gone on to chalk up a record daily volume of 11.3 billion on May 18, and a record daily value of RM9.38 billion on May 29. The higher the trading value, the more revenue Bursa generates.

Bloomberg data shows there are currently 10 “buy”, three “hold” and three “sell” calls on the stock, with the average 12-month target price being RM6.73.

“Whether or not there is room for [an upward] rerating of the stock depends on how well the trading activity holds up. If trading value stays elevated, it will be good for Bursa. For now, we maintain our ‘hold’ call and target price of RM6.40,” an analyst with AllianceDBS Research tells The Edge, citing concerns about the current trading “exuberance” in the market.

Indeed, all eyes are on how long the recent heightened trading activity on the exchange will keep up. The benchmark FBM KLCI has rebounded 28% (as at the June 4 closing of 1,561.84 points) from its trough of 1,219.72 on March 19, helped by strong buying in rubber glove makers.

On the derivatives market front, the FBM KLCI Futures contract registered an all-time high in daily trading volume on May 27, with 65,000 contracts.

Jeremy Goh, an analyst with Hong Leong Investment Bank Research, expects Bursa to achieve record earnings this year on the back of a possible all-time high in the stock market’s average daily trading value (ADV). Last week, he raised his target price for the stock to RM8.95 from RM7.87.

“Our investment case on Bursa remains intact: (i) ADV for 2020 is on track for a record showing, (ii) high retail participation is good for rate earned on equities, and (iii) high volatility augurs well for derivatives ADC (average daily contracts).

“However, we took a relook at our ADV assumption (previously RM2.25 billion) and felt that this could be on the conservative end given the year-to-date (YTD) number of RM2.86 billion. We raise FY2020-FY2021 earnings by [6-plus per cent] with ADV assumption of RM2.41 billion/RM2.47 billion, still below the YTD sum.

“We reaffirm ‘buy’ with a higher target price of RM8.95 (30 times PE on FY2020 earnings per share). With record earnings on the offing, a PE rerating to a new high isn’t too farfetched,” says Goh in the June 2 report. At the time, Bursa was trading at RM8.03.

Bursa deserves a “scarcity premium”, he says, it being one of very few listed companies to be able to deliver earnings growth amid the global Covid-19 pandemic.

Given the “hot” stock market of late, some worry about a correction coming up soon.

Goh argues, however, that this would actually bode well for Bursa’s ADV. “In fact, we expect a W-shaped trajectory for the market which, intuitively, augurs well for ADV via heightened trading,” he says.

Bursa’s net profit fell 17% year on year to RM185.9 million in the financial year ended Dec 31, 2019 (FY2019). Its 1QFY2020 net profit of RM64.7 million — up 38.2% y-o-y and up 42.1% quarter on quarter — was stronger than analysts had expected, coming in at 33% of consensus estimates for the full year. Securities trading revenue made up 53.7% of its operating revenue of RM145.5 million, while derivatives trading revenue made up 18.3% of it. Turnover velocity in the securities market that quarter surged to 39% from 26% in the preceding quarter.

Bursa’s 2Q2020 earnings are likely to be better given the stronger trading activity in that period, analysts say. There has been a 54% jump in new retail investor accounts from January to April compared with the year-ago period, Bloomberg reported last week, citing Bursa CEO Muhamad Umar Swift. Retail investors were also more active, causing the daily trading value to surge 65% in April from a year ago.

While foreign funds pulled US$3.2 billion (RM13.6 billion) from Malaysian stocks this year, local individual investors have poured in RM4.03 billion, according to Umar. Brokerage houses’ move last week to tighten margin financing on glove makers’ stocks does not appear to have dampened investor fervour for such stocks.

“The market has priced in the optimism of a recovery in earnings post-Covid-19, but valuations could rerate further if more liquidity enters the stock market,” CGS-CIMB Research says in a June 4 market strategy report.

Bursa has been one of few companies to deliver decent dividends over the years, even paying out special dividends in FY2017 and FY2018. Goh expects the company’s dividend per share to rise to 26.8 sen this year from 20.8 sen last year.

“At the moment, a special dividend is not something that I am pricing in, as Bursa will require a fair bit of capital expenditure for the upgrading of some of its systems, which will be undertaken progressively from this year and across the next two years or so,” he tells The Edge. Bursa was in a net cash position of RM252.4 million as at end-March.

 

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