As of end-May, Bursa Malaysia has been newly certified Shariah-compliant by the SC. Bursa’s recent inclusion is due to the new benchmark rules which apply to Stock Exchange Holding Companies, which mandates that all ‘Activities Beyond Control’ cannot exceed 33% of sales or PBT. In relation to recent discussions about Bursa’s dual role as a stock market operator and regulator of publically listed companies, Bursa could potentially be relieved of its regulatory duties, which may result in staff cost savings. Forecasts remain unchanged. In light of Bursa’s recent classification as a Shariah compliant counter, we raise our PE multiple from 25.0x to 26.1x pegged to +1SD above its 3 year mean PE. We opine that Bursa’s status as a large cap Shariah compliant counter warrants a scarcity premium. After rolling over our valuation year from FY19 to FY20, our TP rises to RM7.54.

Shariah Compliant and new benchmark. As of end-May, Bursa Malaysia has been newly certified Shariah-compliant by the Securities Commission. Previously, Bursa was excluded from the list of Shariah compliant companies as its non-Shariah compliant income accounted for >20% of total earnings. However, Bursa’s recent inclusion was due to the new benchmark rules which apply to Stock Exchange Holding Companies (SEHC), which mandates that all ‘Activities Beyond Control’ (trading fees, listing fees, settlement and depository of listed non-Shariah counters) cannot exceed 33%.

Bursa’s regulatory functions to be removed? In reference to an article published in The Edge, we note that Bursa effectively plays in dual role in operating the stock exchange as well as playing a regulatory role in policing the publically listed companies on its exchange that it effectively profits from. We note that SC has been in discussion to resolve this conflict of interest. One potential outcome is that Bursa may be stripped of its compliance duties, which could theoretically result in lower staff cost. While it is difficult to quantify the magnitude of cost savings should this occur, we note that staff cost remains Bursa’s largest cost, which totalled RM135.3m in FY18, representing 56% of Bursa’s total operating cost.

Growing interest in derivative market from foreign institutions. We note that derivative trading from foreign institutions have been steadily growing in recent years (figures 2&3). We reckon this is due to Bursa extending the trading session by half an hour, increasing the permitted tenure to 36 months, and increasing position limits for FCPO contracts. Additionally, new derivative product offerings (FBM Mid 70, FPOL) could spur future derivative trading as Bursa seeks to increase derivative trading via education sessions with the general investing community.

Outlook. We expect ADV to decline approximately 5% in FY19 given FY18’s high base effect of ADV of RM2.6bn (driven by heightened trading post GE14). Given the ADV figures in 2Q19 (figure 1), we expect a tepid 2Q19.

Forecast. Maintain Forecast.

Upgrade to BUY. In light of Bursa’s recent classification as a Shariah compliant counter, we raise our PE multiple from 25.0x to 26.1x pegged to +1SD above its 3 year mean (figure 4). We opine that Bursa’s status as a large cap Shariah compliant counter warrants a scarcity premium. After rolling over our valuation year from FY19 to FY20, our TP rises to RM7.54.

Source: Hong Leong Investment Bank Research - 28 Jun 2019