ALLIANCEDBS Research said it expects Bursa Malaysia Bhd (Bursa) to register strong earnings for its 1QFY20 results due to strong performance in the equity and derivatives markets.
It said Bursa’s average daily value traded (ADVAL) was at a five-year high, while volatile crude palm oil (CPO) prices and the KLCI Index helped drive up their respective futures volumes to multi-year peaks.
Trading activity is expected to moderate ahead of lower foreign participation but should still be supported by positive sentiment on the planned resumption of major infrastructure projects and economic recovery in the latter part of the year.
At -1 standard deviation of its five-year and 10-year means, it believes that Bursa’s valuation remains compelling for a stock with consistent dividends and a recurring revenue stream.
The research firm opined that the bourse’s prospects in FY21 and FY22 are bright on assumption of sentiment improving after Covid-19 fallout dissipates over time, supported by government stimulus and economic recovery.
Another catalyst for Bursa’s share price would be revisions to its fee structure (eg listing fees, clearing fees) and a downscaling of its surveillance role which would unlock its earnings potential.
AllianceDBS has maintained its buy recommendation but with a lower target price (TP) of RM6. It trimmed its FY20-FY21 earnings by 4% respectively after incorporating lower listing fee revenue, translating to a lower TP. Current valuations which are at a five-year trough are still compelling for a business with a fairly stable dividend and recurring income stream.
The key risks to its recommendation is worsening market sentiment. Its sensitivity analysis shows that every 5% decrease in average daily trading value would lower Bursa’s FY20 net profit by 4%.
The suspension of short-selling until April 30 should have limited impact on Bursa’s earnings as it only contributes around RM100 mil in ADVAL (less than 1%). Volatile prices and index performance bode well for derivatives. Activity in the derivatives market has also been strong in 1Q20, led by an upsurge in crude palm oil futures (FCPO) contracts.
CPO prices remained volatile over the quarter due to demand concerns and contagion from weak oil price sentiment. Average daily volumes in 1Q20 spiked by 86% yoy and 37% qoq as CPO prices fell from north of RM3,000 per metric tonne (MT) to RM2,300/MT in the span of two months.
Futures on the KLCI Index saw a substantial pick up towards March, translating to a 77% increase in average daily contracts yoy (49% qoq). Stable revenue unlikely to impress. 2019 was a muted year for Bursa’s revenue with lower value raised (-28%). At this juncture, weak stock market valuations will likely translate to deferment of listings and secondary offerings exchange and depository and clearing house in Malaysia.
Bursa shares were traded at RM5.28 at the close of the afternoon trading session, up 18 sen compared to yesterday’s close with 1.08 million shares changing hands. – April 9, 2020
