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This article first appeared in The Edge Financial Daily on September 20, 2019

Bursa Malaysia Bhd
(Sept 19, RM6.05)
Maintain hold with a higher fair value of RM6.70, from RM6.50 previously:
Our valuation is based on financial year 2020 (FY20) price-to-earnings (PE) of 24 times its five-year historical average PE. We continue to see the stock as fairly valued, trading at 23 times FY20 PE. We raise both our FY20/21 by 4% to RM225 million/RM243 million by removing the minority interest following the announcement by Bursa Malaysia to acquire the remaining 25% equity interest in Bursa Malaysia Derivatives (BMD).

Bursa Malaysia will be acquiring the 25% stake, or 12.5 million shares, in BMD that it does not own from CME Group Strategic Investments LLC (CMEGSI) through the exercise of put option by CME Group Inc (CME Group) on Sep 16. CMEGSI is a wholly-owned subsidiary of CME Group. CMEGSI acquired the 25% equity interest on Nov 30, 2009 for RM55 million.

The acquisition price has been fixed at RM162.4 million, to be fully satisfied by cash together with an additional sum to be determined later based on 25% of 70% of BMD operating profit before tax for the second and third quarters of FY19 (2QFY19 and 3QFY19). Any dividend payments by BMD for 2QFY19 and 3QFY19 will reduce the amount for the additional sum.

Funding for the acquisition will be from the disposal of quoted shares outside of Malaysia which are owned by Bursa Malaysia. Hence, it will not have any impact on the group’s gearing position.

Presently, Bursa Malaysia owns 75% of BMD. On completion of the transaction, BMD will become Bursa Malaysia’s wholly-owned subsidiary.

Based on the audited financials for FY18, profit and net assets attributable to the 25% equity interest in BMD amounted to RM6.57 million and RM12.2 million respectively.

This transaction is expected to be completed by early December 2019. Hence, it will not have any material impact on FY19 earnings per share (EPS). However, for FY20 and FY21, the acquisition is accretive and slightly positive on EPS with the removal of minority interest.

Meanwhile on the proforma impact on its FY18 balance sheet, the initial settlement of RM162.4 million will decrease Bursa Malaysia’s retained earnings by RM150.2 million and non-controlling interest by RM12.3 million. These will consequently lower its net asset per share to 90 sen from RM1.08.

Bursa Malaysia will still collaborate with CME for derivatives with the latter continuing to host BMD products on CME Globex electronic trading platform (Globex).

Bursa Malaysia and CME have agreed to make variations to the Globex Services Agreement (GSA) executed on Sept 17, 2009, which remains effective until Sept 19, 2020. — AmInvestment Bank, Sept 19

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