Investment Highlights

• We raise our fair value on Bursa Malaysia (Bursa) to RM7.50/share from RM6.90/share after the completion of its bonus issue by rolling over our valuation to FY19 based on a PE of 24x (5-year historical average PE). While we remain positive on the local equity market, we continue to see the stock trading at a higher valuation (23.4x PER) compared to the stock exchanges of Singapore (SGX Exchange Ltd) of 20.1x PER and Australia (ASX Ltd) of 22.5x PER. Hence, we maintain our HOLD recommendation. We make no changes to our earnings estimates.

• Bursa has completed its bonus issue of 1 bonus share for every 2 existing shares held, resulting in an issuance of 268.7mil bonus shares. This has enlarged its number of shares from 537.5mil to 806.3mil shares. Our estimates have already taken into account the enlarged number of shares.

• Bursa is scheduled to release its 1QFY18 results on 25 April. We expect Bursa's 1QFY18 to come in between RM59mil and RM60mil (+8.3%QoQ; +5.8%YoY). This will be higher than the RM55.3mil reported in 4QFY17 and RM56.6mil in 1QFY17. The stronger 1QFY18 earnings are based on a higher daily average trading value (DATV) for equities with strong inflow of foreign funds to the securities market in 1QFY18. Meanwhile, trading revenue for derivatives in 1QFY18 is expected to be softer QoQ with a higher average daily contracts (ADC) traded for FCPO offset by lower ADC for the FKLI.

• For 1QFY18, DATV (OMT) for equities rose to RM2.71bil vs. RM2.32bil in 4QFY17 and RM1.95bil in 1QFY17. By month, in Feb and Mar 2018, it has tapered to RM2.67bil and RM2.30bil respectively from a high of RM3.20bil in Jan 2018. We estimate the market velocity for 1QFY18 to be higher at 34.7% vs. 30.8% in 4QFY17. Market turnover (velocity) was lower in Feb and Mar compared to Jan 2018.

• Year to date (YTD), foreign fund flows to equities are still positive, cumulating in RM2.8bil up until 11 April 2018. On a monthly basis, foreign fund inflows in Mar and Feb 2018 were -RM63.7mil and -RM1.1bil respectively, reflecting net selling of equities by foreign investors (refer Exhibit 3 below). This was in contrast to a strong positive inflow of foreign funds of RM3.4bil to the local equity market in Jan 2018 and RM959mil in Dec 2017.

• For 1QFY18, we expect the average daily contracts (ADC) traded for the FKLI, which attracts higher trade fees compared to the FCPO, to be lower QoQ. Meanwhile, the average daily contracts (ADC) traded for the FCPO are expected to rise in 1QFY18 compared to 4QFY17. Overall, we anticipate the ADC traded for derivatives (FKLI, FCPO and others) to slip QoQ. We saw increased volatility based on VIX Index reading (a proxy for market volatility) which has risen to 20.24 from 9.77 at the start of 2018.

• We keep our 2018 KLCI target of 1,900 while for 2019, we have a year-end target of 2,040. This is supported by an earnings growth of 6.8% and 7.3% for the FBM KLCI on the back of projected GDP growth of 5.5% and 5.3% respectively for 2018 and 2019. This is at a 1x multiple premium to the 5-year historical average of about 17x, largely to reflect the cyclical upturn in corporation earnings growth.

• In our projected earnings for Bursa, we have factored in an improvement in DATV for equities to RM2.5bil (+8.0%YoY) and RM2.65bil (+6.0%YoY) for FY18 and FY19 respectively. We are maintaining our DATV assumptions for the securities market for now.

Source: AmInvest Research - 17 Apr 2018