This article first appeared in The Edge Financial Daily on January 16, 2020

Bursa Malaysia Bhd
(Jan 15, RM6.06)
Upgrade to outperform with a higher target price (TP) of RM6.50: Our extractions from Bloomberg showed that fourth quarter ended Dec 31, 2019 (4QFY19) average daily value (ADV) came in at RM1.79 billion (down 7% year-on-year [y-o-y], down 4% quarter-on-quarter [q-o-q]) versus our expected RM1.95 billion.

Full-year ADV stood at RM1.93 billion, slightly short of our expectation of RM1.97 billion. Much like 2018, market forces were tepid and failed to muster an anticipated window dressing in the final trading hours. The FBM KLCI also closed weaker at 1,588.76 points, or down 6% y-o-y, against hope that it could trail at technical support levels of 1,600.

To recap, poor trading sentiments in 2019 could be attributed to paring of contract values of various megaprojects, the disruptive US-China trade war and a weak ringgit.

In the first few trading days of 2020 (up to Monday), the market was spurred by higher crude palm oil prices at the tail end of 2019 (rising from RM2,000 to about RM2,600 per tonne), painting a more robust ADV of RM1.88 billion, from RM1.84 billion in the corresponding period of 2019.

The boon to plantation counters could reinvigorate the sector from its previous lull. Coinciding with our strategist’s view, the construction sector may also see new excitement with the possible revival of megaprojects, which are much needed to induce economic activity. Meanwhile, though US-China trade war tensions are still ongoing, the damage to market sentiment seems to be easing and may stir less discomfort to foreign investors. Our in-house KLCI target for 2020 is 1,712 points with the US dollar to the ringgit at 4.100.

For numbers, we slightly tweak our FY19 and FY20 assumptions by 0.9% lower and 0.6% higher respectively from inputting 4QFY19 ADV numbers and updates to our KLCI target.

Anticipating FY19 to close with a core net profit of RM183.3 million, down 18% from FY18, mainly due to a soft securities trading (about 50% of total revenue) landscape from the above-mentioned reasons dampening total operating revenue (down 9% y-o-y).

The disparity and margin erosion came from an overrun of operating expenses, despite efforts already in place to trim certain fixed cost items (staff and technology expenses). On a quarterly level, 4QFY19 is expected to come in at RM43 million (down 17% y-o-y, down 9% q-o-q) with the decline having much to do with ADV not picking up, as mentioned above.

We anticipate Bursa Malaysia Bhd to declare a dividend of about 11.6 sen, amounting to a full-year payment of 22 sen from a payout of about 95% (4QFY19 results are earmarked to be released on Jan 30, 2020). With hope for a better outlook in FY20, we opine ADV will be about RM2.1 billion and earnings to recover by about 5% from a healthier trading environment and higher KLCI levels, leading to a FY20 net profit of RM194.6 million (up 6% y-o-y).

Our TP is based on a higher applied 270 times estimated FY20 price-earnings ratio. We anticipate greater investor activity justified by the above to translate into better sentiment for the stock, post-2019’s gloom, when stronger trading appetite is reflected in the group’s results.

We also see the downside to be cushioned by the presently fair dividend yield of about 4% from an average payout of about 95%, with chances for special dividend bonuses (based on past two-year trends). — Kenanga Research, Jan 15