Bursa Malaysia - More relevant in the Asian context

Reversing the declining trend in the past five quarters, Bursa Malaysia’s (Bursa) 2Q09 net profit went up 22.3% yoy and 125.9% qoq to RM35m. Revenue from the equity market soared 145.8% qoq while derivatives revenue and stable revenue went up 25.0% and 3.5% qoq respectively. The results were largely in line with expectations.

Going forward, while our assumed turnover velocity remains largely unchanged at 66.5% (47% in Jun 09), total market capitalisation for shares listed on Bursa went up from RM651b at end-Mar 09 to RM806b at end-Jun 09. Hence, the need for us to raise our forecast market turnover. We revised our ADT assumptions higher for 2009 (from RM1.2b to RM1.5b), 2010 (from RM1.9b to RM2.4b) and 2011 (from RM1.9b to RM2.4b). As a result, we raised our 2009, 2010 and 2011 earnings forecasts by 29%, 27% and 26% respectively.

Bursa’s 2009 full-year earnings were dragged down by the weak market turnover in 1Q09 (RM0.7b). We forecast a further pick-up in market turnover in 2H09. In addition, we are rolling into 2010 in less than six months. Hence, our fair price should be based on 2010 PE. In the past, we set our fair PE based on global weighted average of major exchanges. With global liquidity shifting towards Asian markets, we believe the valuation for Bursa is more relevant in the Asian context. Based on the above rationale, we change our fair PE for Bursa from 18.7x 2009 PE (global weighted average of major exchanges) to 25x 2010 PE (weighted average of listed exchanges in Asia). As a result, we raised our fair price for Bursa from RM3.30 to RM8.20. Upgrade to HOLD. Entry price is RM7.00.

On the policy front, the 30% Bumiputra equity requirement is now replaced by a Bumiputra equity condition of 12.5% (ie half of 25% public spread). More importantly, there will not be requirements to maintain Bumiputra equity condition after the IPO. Foreign investors will be allowed to own up to 70% of stock broking companies, compared with the previous 49% limit. Foreign fund managers will be allowed to establish 100% foreign owned fund management companies in Malaysia. We expect the relaxation on the equity market will encourage more new listings and boost market turnover.

Internally, hefty investment in a new trading system has enabled Bursa to handle trades more efficiently, mitigating the likelihood of a major system failure. The potential direct market access capability for the equity market is positive for Bursa and this bodes well for velocity in the long run. Experience from other exchanges indicates that the DMA equity will increase the volume by 20-25%. We expect Bursa’s ongoing business initiatives to improve velocity in the long term.