Investment Highlights

• We maintain our HOLD recommendation with a revised fair value on Bursa Malaysia (Bursa) to RM6.70/share from RM6.50/share. Our valuation is based on an FY20 PE of 24.0x (5-year historical average PE). We continue to see the stock as fairly valued, trading at 23.0x FY20 PE. We raise both our FY20/21 by 4.0% to RM225mil/RM243mil by removing the minority interest following the announcement by Bursa to acquire the remaining 25.0% equity interest in Bursa Malaysia Derivatives (Bursa Derivatives).

• Bursa will be acquiring the 25.0% stake (12,500,000 shares) in Bursa Derivatives that it does not own from CME Group Strategic Investments LLC (CMEGSI) through the exercise of put option by CME Group Inc (CME Group) on 16 Sep 2019. CMEGSI is the wholly-owned subsidiary of CME Group. CMEGSI acquired the 25% equity interest on 30 Nov 2009 for RM55mil.

• The acquisition price has been fixed at RM162.4mil, to be fully satisfied by cash together with an additional sum to be determined later based on 25.0% of 70.0% of Bursa Derivatives’ operating profit before tax for the 2nd and 3rd quarters of FY19. Any dividend payments by Bursa Derivatives for the 2nd an 3rd quarters of FY19 will reduce the amount for the additional sum.
• Funding for the acquisition will be from the disposal of quoted shares outside of Malaysia which are owned by Bursa. Hence, it will not have any impact on the group’s gearing position.
• Presently, Bursa owns 75.0% of Bursa Derivatives. Upon completion of the transaction, Bursa Derivatives will become a wholly-owned subsidiary of Bursa.

• Based on the audited financials for FY18, profits and net assets attributable to the 25.0% equity interest in Bursa Derivatives amounted to RM6.57mil and RM12.2mil respectively.

• This transaction is expected to be completed by early Dec 2019. Hence, it will not have any material impact on FY19 EPS. However, for FY20 and FY21, the acquisition is accretive and slightly positive on EPS with the removal of minority interest.

• Meanwhile on the proforma impact to its FY18 balance sheet, the initial settlement of RM162.4mil will decrease Bursa’s retained earnings by RM150.2mil and noncontrolling interest by RM12.3mil. These will consequently lower its net asset per share to RM0.90 from RM1.08.

• Bursa will still collaborate with CME for derivatives with the latter continuing to host Bursa Derivatives products on CME Globex electronic trading platform (Globex).

• Bursa and CME have agreed to make variations to the Globex Services Agreement (GSA) executed on 17 Sep 2009 which remained effective until 19 Sep 2020. Amongst the key variations include the revision to the tiered fee structure on the provision of Globex services by CME. This is expected to provide cost savings to Bursa Derivatives moving forward.

• In addition, both parties have also agreed to extend the initial renewal term of the agreement from 3 years to 5 years, to be effective until 19 September 2025, and with the option of renewing it subsequently for terms of 3 years. Besides, the notice period for termination and the non-renewal of GSA has been extended from 18 to 24 months.

Source: AmInvest Research - 19 Sept 2019