Bursa announced that it has extended its agreement with Chicago Mercantile Exchange (CME) to offer Bursa’s derivative products for trading on their platform until September 2025. Additionally, Bursa announced it will acquire the remaining 25% stake in its 75%-owned subsidiary Bursa Malaysia Derivatives Bhd from CME for RM162.5m. After incorporating higher earnings from Bursa’s full ownership of the derivative subsidiary, our FY20/21 earnings rise by 3.1%. Despite the increased derivative earnings, we lower our PE multiple from 26.1x (+1SD) to 24.5x (5-year mean) to reflect the weaker ADV in 3Q thus far. Despite its recent Shariah status, we reckon this scarcity premium will be offset by tepid ADV figures, hence justifying our preference for a mean valuation rather than at +1SD. All in, TP falls from RM7.00 to RM6.75; maintain HOLD.

NEWSBREAK

Bursa announced that it has extended its agreement with Chicago Mercantile Exchange (CME) to offer Bursa’s derivative products for trading on their platform until September 2025 (with the option of successive renewal terms of 3 years thereafter). The current agreement is set to expire in September 2020. Additionally, Bursa has announced it will acquire the remaining 25% stake in their 75%-owned subsidiary Bursa Malaysia’s Derivatives division from CME for RM162.5m following CME’s exercising of their put option to dispose their stake to Bursa. The acquisition is expected to be completed by early December 2019. Following the acquisition, Bursa Malaysia Derivatives division will be a wholly-owned subsidiary of Bursa.

HLIB’s VIEW

Reasonable valuation. Based on our back of the envelope calculation, the RM162.5m for 25% stake of the derivative business represents a PE of 24.7x of FY18 derivative earnings. As Bursa’s five-year average PE is approximately 24.5x, we deem this to be a fair price.

Threat across the strait. We suspect the logic behind CME’s decision to exercise their option to dispose their 25% stake in Bursa Malaysia’s Derivative division is due to the rising influence of Singapore’s Asia Pacific Exchange (Apex) on crude palm oil futures (FCPO). Note that although Apex only began offering FCPO trading in May 2019, it already has daily FCPO volumes of >20k contracts (for comparison, Bursa Malaysia averaged 43k contracts traded in FY18). Note that FCPO trading remains the lifeblood of Bursa’s derivative trading division, making up approximately 80% of all derivative contracts traded on its exchange.

Outlook. QTD (1 July to 17 Sept) ADV average of RM1.88bn is significantly lower than the RM2.47bn recorded in 3Q18. Based on an approximate calculation of RM2.17bn ADV in 9M19, this represents a 21.4% decline vs the RM2.76bn ADV in 9M18. Note that ADV was boosted by exuberant equity trading in 9M18 from increased equity trading post GE14.

Forecast. After incorporating the higher earnings from Bursa’s full ownership of the derivative subsidiary, our FY20/21 earnings rise by 3.1%/3.1%.

Maintain HOLD. Despite the increased derivative earnings, we lower our PE multiple from 26.1x (+1SD) to 24.5x (5-year mean) to reflect the weaker ADV thus far this year. Despite its recent Shariah status, we believe this scarcity premium will be offset by tepid ADV figures, hence justifying our preference for a mean valuation rather than at +1SD. All in, our TP falls from RM7.00 to RM6.75; HOLD call is maintained.

Source: Hong Leong Investment Bank Research - 19 Sept 2019