Investment Highlights

• We upgrade our recommendation on Bursa Malaysia (Bursa) to BUY from HOLD with a revised fair value of RM6.40/share (previously RM6.05/share). We fine-tune our earnings for FY20/21/22 by 3.8%/0.8%/0.9% as we factor in lower operating expenses and revenue from listing fees. We continue to peg the stock to FY20 PE of 24.0x (5-year historical average PE).

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

• Bursa Malaysia will be releasing its 1Q20 results on 30 April (Thursday). We expect earnings for 1Q20 to come in strongly at circa RM67mil (+46.3% QoQ, +42.2% YoY). This is based on a higher securities and derivatives trading revenue.

• On the securities market, DATV (on OMT basis) for equities rose to RM2.5bil in 1Q20 compared to RM1.8bil in 4Q19 and RM2.1bil in 1Q19. Market velocity jumped to 39.0% in 1Q20 from 4Q19’s 26.0% and 1Q19’s 29.0%.

• In 1Q20, foreign fund flows to equities on cumulative basis registered an outflow of RM7.6bil vs. -RM3.2bil in 4Q19 and -RM1.3bil in 1Q19. Foreign investors continued to be net sellers of equities in Jan, Feb and Mar 2020 (see Exhibit 1).

• The average total contracts traded for derivatives surged by 35.7% QoQ to 85,578 in 1Q20. This was supported by higher average daily contracts (ADC) traded for FCPO and FKLI by 36.9% QoQ and 48.9% QoQ to 69,194 and 15,072 contracts respectively.

• YTD, there have been 7 new listings in the securities market (Main Market: 1, ACE Market: 2 and LEAP Market: 4). 2019 saw a total of 30 IPOs (Main Market: 4, ACE market: 11 and LEAP Market: 15). We expect potential IPOs to be deferred with the Covid-19 pandemic affecting investors’ sentiment and causing markets to be volatile.

• Bursa’s operating expenses are expected to gradually improve. This is premised on: i) the internal restructuring to a flatter management structure effective 1 Jan 2020 with the departure of 4 senior management personnel to reduce staff cost; and ii) the recent amendments to the Globex Services Agreement (GSA) which will provide savings in the teens on service fees to be paid to the CME for derivatives trading. Recall, in FY19, Bursa incurred expenses of circa RM20mil on service fees. Also, the impairment on computer software of RM3.3mil in 4Q19 is not expected to recur in FY20.

• As a dividend stock with an average payout of 92.6% in the past five years (excluding special dividends in FY17 and FY18), this will cushion the downside risk on its share price as investors lean towards dividend-yielding stocks in times of uncertainty. We are maintaining our dividend payout assumption of 91.0% for FY20 with a decent yield of 4.2%.

• The local exchange recently announced relief measures to mitigate the Covid-19 impact on the capital market. Among the key measures was the rebate of 50% on the annual listing fees for 2020 for listed companies with a market capitalization of below RM500mil as of 31 Dec 2019; and reporting financial losses in the quarter ended between 1 April 2020 and 30 June 2020.

• On the Main Market, the annual listing fees are determined based on 0.0025% of the total market value of the share capital of the listed issuer, subject to a minimum fee of RM20,000 and a maximum of RM100,000. Meanwhile, the annual listing fees for ACE Market are 0.012% of the total market value of the share capital of the listed issuer, subject to a minimum of RM10,000 and a maximum of RM20,000. On the LEAP Market, a fixed annual listing fee for shares of RM5,000 applies. In view of the fact that the 50% rebate on annual listing fees will only be applicable to smaller listed companies (market cap < RM500mil) and those reporting losses at group level, we estimate the impact to be minimal (< 5%) on Bursa’s earnings.

• Amid the volatility and global uncertainties stemming from the Covid-19 pandemic, the Securities Commission and Bursa Malaysia has temporarily suspended short selling (intraday and regulated short selling) until 30 April 2020. Also, it has provided more flexibility for brokers to manage margin accounts.

• The stock’s foreign shareholdings declined to a low of 15.4% in March 2020 from a high of 28.6% in March 2018. This will provide more stability to the share price. Foreign ownership of the securities market was 22.3% in March 2020 unchanged from December 2019.

• For now, we are keeping our FY20 and FY21 DATV assumptions of RM2.0bil and RM2.2bil for securities market. For derivatives trading revenue, we are projecting a growth of 7.8% and 4.5% for FY20 and FY21 respectively.

Source: AmInvest Research - 17 Apr 2020