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This article first appeared in The Edge Financial Daily on March 13, 2020

Bursa Malaysia Bhd
(March 12, RM5.28) 
Upgrade to buy with a target price of RM6.10:
With Bursa Malaysia Bhd’s share price down 11.5% year to date (YTD), we reckon the stock is worth a relook on the back of heightened equities’ average daily volume (ADV), increased retail participation, higher derivatives’ average daily contract (ADC), and a stable base of non-trading revenue.

The first quarter of 2020 (1Q20) has so far been marred by several market negative events — starting from the US-Iran tensions in January, the Covid-19 outbreak in January and still raging globally, domestic political shifts in February and the recent oil price plunge. 

Despite all these developments, equities’ ADV has been robust on the back of selling pressure, with the YTD number at RM2.39 billion versus 4Q19’s RM1.79 billion (+33.4%) and 1Q19’s RM2.07 billion (+15.5%). With the healthy ADV seen YTD, our initial financial year 2020 (FY20) assumption of RM1.9 billion seems rather low. Bursa’s market capitalisation-to-ADV ratio is at 1.54 times or -2 standard deviation below mean (2.39 times), suggesting that valuations have yet to reflect the positives from stronger trading.

We note that retail participation in equities has risen to about 27.4% YTD versus 25% in 2019. This is positive for Bursa as clearing fee (0.03%) is capped at RM1,000. A higher proportion of lower value traders — the retailers — means that the blended fee earned by Bursa would increase, as not many retailers would have a trade value of more than RM3.3 million to take advantage of the RM1,000 cap. To illustrate, when retail participation rose from 22% in 2018 to 25% in 2019, the overall implied rate earned on equities (equities revenue/traded value) increased from 0.046% to 0.049%.

Bursa’s non-trading revenue (classified as “others” in its annual report) made up 36.5% (RM175 million) of total revenue in FY19. We expect this to remain relatively stable for FY20; the swing components generally tend to be Bursa Suq Al-Sila’ (BSAS), and listing and issuer services. For BSAS, the higher volume will likely be offset by lower implied fee earned and for listing and issuer services, total market capitalisation for FY19 at RM1.71 trillion (used as a base for FY20 fee) was unchanged versus FY18’s RM1.70 trillion.

We raise FY20 earnings by 6%, translating to an 11% year-on-year growth, largely on the back of higher ADV from RM1.9 billion to RM2 billion, and increased ADC from 52,500 to 60,600. Earnings for FY21 are largely unchanged (+0.3%) and FY22 forecast is introduced. — Hong Leong Investment Bank Research, March 12

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