Investment Highlights

• We maintain our BUY recommendation on Bursa Malaysia (Bursa) with an unchanged fair value of RM6.40/share. We continue to peg the stock to FY20 PE of 24.0x (5-year historical average PE). No changes to our estimates.

• Bursa reported a significant improvement in earnings to RM65mil (+42.1% QoQ, +38.2% YoY) in 1Q20. This was on the back on of a higher securities and derivatives trading revenue. Net profit came in slightly below our expectation of RM67mil for the quarter. It was within expectation accounting for 30.0% of our estimate. However, it was above consensus estimate, making up 32.8% of street projection.

• 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).

• 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.

• The average total contracts traded for derivatives surged to 85,578 (+35.7% QoQ; +80.7% YoY) in 1Q20. This was supported by higher average daily contracts (ADC) traded for FCPO and FKLI of 85.8% YoY and 77.0% YoY to 69,194 and 15,072 contracts respectively.

• 1Q20 operating revenue rose by 20.0% YoY driven largely by increase in securities and derivatives trading revenue. Additionally, listing and issue services fees also increased due to higher number of IPOs. Meanwhile, trading revenue from BSAS fell due to lower average DATV of RM30.4bil in 1Q20 (1Q19: RM31.6bil). Conference fees and exhibition related income decreased in 1Q20 contributed by the deferment of the palm oil conference with the Covid-19 pandemic concerns continuing to linger.

• Bursa’s operating expenses (OPEX) were well controlled with a growth of 2.0%YoY in 1Q20. The increase was contributed by the provision of variable cost for staff expenses, higher services fees (Globex fees) with the rise of the number of derivatives contracts traded and professional fees which had to be incurred. CI ratio improved to 42.1% in 1Q20 vs. 49.0% in 1Q19, reflecting better operating efficiency. Moving forward, we continue to expect a gradual improvement in OPEX largely from lower staff cost benefitting from its internal restructuring to a flatter management structure effective 1 Jan 2020 and the non-recurrence of impairment charges on computer software of RM3.3mil in 4Q19.
   
• Recall, 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 that: i) have a market capitalization of below RM500mil as of 31 Dec 2019 and ii) reporting financial losses in the quarter ended between 1 April 2020 to 30 June 2020. We estimate the impact from this measure to be minimal (< 5%) on Bursa’s earnings. Also, Bursa will be waiving the processing fees of IPO applications for the ACE and LEAP Markets. For companies seeking listing on the ACE, LEAP as well as the Main Market with less than RM500mil market capitalization, the exchange will also waiving the initial and annual listing fees.
   
• Amid the volatility and global uncertainties stemming from the Covid-19 pandemic, the Securities Commission and Bursa Malaysia have further suspended short selling (intraday and regulated short selling) until 30 June 2020.

• 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.

• No dividends have been declared in 1Q20.

• VIX Index (a measure of market volatility) of 31.3 remained higher than the average in the past 12 months of 21.3 despite tapering from the peak in Feb-Mar 2020 (Refer Exhibit 9). Market is expected to remain volatile in the near term due to uncertainties on the recovery of the global economy from Covid-19 and the weak oil prices coupled with the presence of domestic political uncertainties. The volatility of the market is expected to be positive on the trading activities of securities and derivatives.

• As it only the 1Q20’s results, we are keeping our FY20 and FY21 DATV assumptions on the securities market of RM2.0bil and RM2.2bil for now. Meanwhile, for derivatives trading revenue, we are projecting a growth of 7.8% and 4.5% for FY20 and FY21 respectively.

Source: AmInvest Research - 30 Apr 2020