This article first appeared in The Edge Financial Daily on April 20, 2020

Bursa Malaysia Bhd
(April 17, RM5.88)
Upgrade to buy with a higher fair value (FV) of RM6.40: We upgrade our recommendation on Bursa Malaysia Bhd to “buy” from “hold” with a revised FV of RM6.40 (previously RM6.05), after fine-tuning our earnings growth estimates to factor in lower operating expenditure and revenue from listing fees. We continue to peg the stock at a financial year 2020 (FY20) price-earnings ratio (PER) multiple of 24 times (five-year historical average PER).

The higher volatility in the near term will be a boon to the trading revenue of its securities and derivatives market.

Bursa will release its first quarter of FY20 (1QFY20) results on April 30. We expect its earnings for 1QFY20 to come in strongly at about RM67 million (+46.3% quarter-on-quarter [q-o-q]; +42.2% year-on-year). This is based on higher securities and derivatives trading revenue.

On the securities market, the daily average trading value (DATV) for equities rose to RM2.5 billion in 1QFY20, compared with RM1.8 billion in 4QFY19 and RM2.1 billion in 1QFY19. Market velocity jumped to 39% in 1QFY20 from 4QFY19’s 26% and 1QFY19’s 29%.

Meanwhile, the average total contracts traded for derivatives surged by 35.7% q-o-q to 85,578 in 1QFY20. This was supported by higher average daily contracts traded for FCPO and FKLI by 36.9% q-o-q and 48.9% q-o-q to 69,194 and 15,072 contracts respectively.

For its listing segment, we expect potential initial public offerings to be deferred with the Covid-19 pandemic affecting investor sentiment and causing markets to be volatile. Year to date, there have been seven new listings in the securities market.

In the meantime, we expect Bursa’s operating expenditure to improve gradually. This is premised on: i) the internal restructuring to a flatter management structure; and ii) recent amendments to the Globex services agreement which will provide savings on service fees for derivatives trading. 

Recall that in FY19, Bursa incurred expenses of about RM20 million on service fees. Also, the impairment on computer software of RM3.3 million in 4QFY19 is not expected to recur in FY20.

As a dividend stock with an average payout of 92.6% for the past five years, this will cushion the downside risk to its share price as investors lean towards dividend-yielding stocks in times of uncertainty. We maintain our dividend payout assumption of 91% for FY20 with a decent yield of 4.2%.

For now, we keep our FY20 and FY21 DATV assumptions of RM2 billion and RM2.2 billion respectively for the securities market. For derivatives trading revenue, we project a growth of 7.8% and 4.5% for FY20 and FY21 respectively. — AmInvestment Bank, April 17