Although the Black Swans Witnessed This Year (US-Iran Tensions, Covid-19, Domestic Political Shifts and Oil Crisis) May be Blood for Equities in General, This Has Benefitted Bursa Via Heightened Trading Activity. Both Equities ADV and Derivatives ADC Have Shown Robust Numbers YTD, Increasing Vs 4Q19 and SPLY. In Addition, Higher Retail Participation (YTD: C.27.4% Vs FY19: 25%) Should Help Lift Bursa’s Blended Rate on Equities Trading. We Raise FY20 Earnings by 6% But Lower PE Target From 25x to 23.5x (peers Derating) Leading to a Relatively Unchanged TP of RM6.10 (from RM6.12). With PE at -0.5SD and MC/ADV at -2SD, Coupled With -11.5% Share Price Fall YTD, We Feel There Is Now Sufficient Buffer to Warrant a BUY Rating.

With share price of Bursa down -11.5% YTD, we reckon the stock is worth a relook on back of (i) heightened equities ADV, (ii) increased retail participation, (iii) higher derivatives ADC and (iv) stable base of non-trading revenue.

Robust equities trading. 1Q20 has so far been marred by several market negative events; starting from the US-Iran tensions (Jan), Covid-19 outbreak (Jan, ongoing), domestic political shifts (Feb) and just recently, oil price plunge. Despite so, equities ADV has been robust (on back of selling pressure) with the YTD number at RM2.39bn vs 4Q19 at RM1.79bn (+33.4%) and 1Q19 at RM2.07bn (+15.5%). With the healthy ADV seen YTD, our initial FY20 assumption of RM1.9bn seems rather low. Bursa’s market cap-to-ADV ratio (Figure #2) is now at 1.54x or -2SD below mean (2.39x), suggesting that valuations have yet to reflect the positives from stronger trading.

Higher retail participation. We note that retail participation in equities has risen to c.27.4% YTD vs 25% in 2019. This is positive for Bursa as clearing fee (0.03%) is capped at RM1k. A higher proportion of lower value traders (i.e. retail) means that the blended fee earned by Bursa would increase, as not many retailers would have a trade value >RM3.3m to take advantage of the RM1k cap. To illustrate, when retail participation rose from 22% in 2018 to 25% in 2019, the overall implied rate earned on equities (i.e. equities revenue/ traded value) increased from 0.046% to 0.049%.

Increased derivatives ADC. Overall derivatives ADC has also been robust in Jan Feb at 79.9k vs 4Q19 at 63.1k (+26.5%) and SPLY at 43.2k (+85%); see Figure #3.

Stable non-trading revenue. Bursa’s non-trading revenue (classified as “Others” in annual report) made up 36.5% (RM175m) of total revenue in FY19. We expect this to remain relatively stable for FY20; the swing components generally tend to be BSAS and listing and issuer services. For the former, higher BSAS volume will likely be offset by lower implied fee earned and for the latter, total market cap for FY19 at RM1.71trn (used as a base for FY20 fee) was unchanged vs FY18’s RM1.70trn.

Forecast. We raise FY20 earnings by 6%, translating to an 11% YoY growth. This largely comes on back of (i) ADV increase from RM1.9bn to RM2.0bn and (ii) ADC increase from 52.5k to 60.6k. FY21 earnings are largely unchanged (+0.3%) and FY22 forecast is introduced.

Upgrade to BUY, TP: RM6.10. Despite the earnings upgrade, this is offset by lowering our PE target from 25x to 23.5x (tagged to FY20 EPS), inline with the derating of its regional peers (Asia + Australia). All in, our TP falls marginally from RM6.12 to RM6.10. Although the black swans witnessed this year may be blood for equities in general, this has benefited Bursa via heightened trading activity. With undemanding valuations (PE at -0.5SD and MC/ADV at -2SD), coupled with its - 11.5% share price fall YTD, we feel that there is now sufficient buffer to warrant a BUY rating. In addition, yield is also decent at 4.4% for FY20.

Source: Hong Leong Investment Bank Research - 12 Mar 2020