Derivative transactions to thrive on market volatility

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Bursa Malaysia Bhd
(Dec 22, RM8.02)
Maintain “buy” with a target price (TP) of RM8.84:
We expect stronger trading activities in derivatives, mainly crude palm oil futures (FCPO) and FTSE Bursa Malaysia KLCI futures contract (FKLI), riding on higher market volatility. However, we anticipate some challenges on Bursa’s securities trading revenue in financial year 2015 (FY15). This is due to cautious investors’ sentiment  in the near term as a result of global economic uncertainties.

On the other hand, impending listings of initial public offerings (IPOs) in FY15 are likely to support trading activities in the local bourse. Hence, we project a drop of 5% year-on-year (y-o-y) in the average daily value (ADV) traded for equities to RM1.96 billion in FY15. We forecast a modest growth in earnings by 4.0% y-o-y to RM199.9 million in FY15. We maintain “buy” with a revised TP of RM8.84 based on FY15 earnings per share (EPS) of 37.5 sen pegged to its historical five-year average price-earnings ratio (PER) of 23.6 times.

The number of derivatives contracts traded in FY15 is likely to be higher with the market continuing to be volatile. For nine months of FY14 (9MFY14), the average daily contracts (ADC) for both FKLI and  FCPO have grown strongly by 10.7% y-o-y. This has been contributed largely by higher ADC for FCPO. Moving forward, we expect market uncertainties to ensue and this will benefit trading activities  for derivatives. We anticipate the ADC for FKLI and FCPO to rise by 6% y-o-y to 52,500 contracts in FY15.

Impending listings of IPOs are expected to support securities trading activities. The potential listings of 1MDB, Iskandar Waterfront, Sunway Construction, Westar Aviation and Malakoff will be positive in supporting Bursa’s securities trading revenue in FY15. However, some challenges remain as the securities market ADV traded declined to RM1.94 billion pursuant to the December market selloff which was precipitated by slumping crude oil prices after the Organization of the Petroleum Exporting Countries decided not to cut its production. This compares with RM2.1 billion for the first nine months of 2014.

While the decline was not very substantial, however, we still expect some challenges in the securities market in FY15 — First, cautious investor sentiment from lower crude oil prices and economic uncertainties; second, the implementation of the goods and services tax in the second quarter of 2015, which may impact retail securities trades in the short term. — MIDF Research, Dec 22

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This article first appeared in The Edge Financial Daily, on December 23, 2014.