Stock Name: BURSA
Company Name: BURSA MALAYSIA BHD
Research House: HWANGDBS

Bursa Malaysia Bhd
(Oct 6, RM8.24)
Upgrade to buy from fully valued at RM8.20 with target price raised to RM9.60 (from RM6.20): The capital market would be a major source of funding for the US$444 billion (RM1.4 trillion) worth of investments identified under the Economic Transformation Programme (ETP).

Government-linked companies have been reducing stakes to increase free float and more GLCs will be listed.

The stockbroking industry will be fully liberalised by 2015, and there are plans for strategic alliances with regional exchanges such as Hong Kong and Singapore. These should improve trading volumes and values, and ultimately velocity, a key re-rating catalyst for Bursa.

Bursa remains far behind in terms of velocity (31% against SGX's 53%), partly due to lower liquidity and fewer product offerings.

SGX has 21 derivatives products while Bursa has 11, of which only KLCI and CPO Futures are actively traded. However, the CME partnership would globalise the Malaysian CPO futures market and boost derivatives revenue. We expect trading interest to improve and the velocity gap should narrow with Malaysia's derivatives products now traded on CME's Globex platform, more product offerings, higher free floats, and listing companies with larger market caps (planned initial public offering of two Petronas units that can increase total market cap for Malaysian stocks by 4%). We raise our FY11/12F earnings by 6% to 9% after raising average trading values by 8% to13%.

We upgrade Bursa to 'buy' and raise our target price (TP) to RM9.60. Our TP is based on discount dividend model (DDM) valuation with the following assumptions: (i) 6% long-term growth rate, (ii) 11% cost of equity, and (iii) 90% dividend payout.

Bursa has delivered dividend payouts of at least 90% since listing in 2005.

Given its consistent dividend track record, we think the DDM would be a more suitable valuation base and given its excess cash position, we do not discount the possibility of special dividends in the future. ' HwangDBS Vickers Research, Oct 6


This article appeared in The Edge Financial Daily, October 7, 2010.