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Bursa Malaysia Bhd
WITH a low beta (share price volatility) of 0.65 and strong cash generating capability, Bursa (Fundamental: 2.3/3, Valuation: 2.1/3) is a natural choice for defensive yield stock. We also like its resilient business model, good corporate governance and long-term growth prospects.

Bursa has strong “economic moat”, as the sole operator of Malaysia’s stock exchange. It is also the world’s largest palm oil futures trading hub and has a niche in Shariah-compliant products.

In 2014, Bursa derived about half of its total revenue from securities trading and 14% from derivatives market. Recurring and other operating/non-operating income, including interest, accounted for the balance of revenue, and are sufficient to cover 94% of operating expenses (excluding depreciation and tax). 

For 1H15, operating revenue increased 4.3% y-y to RM240.5 million while net profit rose 4.9% to RM96.5 million, driven by growth in derivatives and Islamic trading platform. Revenue from securities trading was flattish, totalling RM115.9 million. 

We do not expect significant earnings growth in 2015-2016, as domestic and external uncertainties will likely keep investors sidelined. Nonetheless, we are sanguine on its medium to long-term prospects as a proxy to the country’s growth.

After distributing excess cash to shareholders in 2013 and 2014, it still has some RM289 million cash sitting on its balance sheet. While it didn’t declare a special dividend this year, there is the possibility for future cash distribution. 

The stock trades at fair valuations of trailing 12-month P/E of 21.2 times, in line with global peers trading at average P/E of 21.8 times. Current valuations are marginally lower than the average P/E of 22.6 times over the past 3 years.

With zero borrowings and relatively low capex requirements, Bursa typically distributes nearly all of its profits as dividends. Excluding special dividend of 20 sen, dividends totalled 34 sen per share in 2014, giving a higher-than-market average yield of 4.2%.

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This article first appeared in digitaledge Daily, on September 18, 2015.

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