Bursa’s share price has appreciated +26% since we upgraded our rating to BUY on 12 Mar; we think it has more legs to run. YTD ADV (RM2.6bn) looks like it could trump the highs of 2017 (RM2.3bn) and 2018 (RM2.4bn) and consequently, record earnings could be in the offing. With that, it wouldn’t be too farfetched to envision Bursa’s PE rerating to its previous highs of >30x (last seen in 3-4Q18). We see Bursa as a “circumstantial beneficiary” of Covid-19 via robust ADV stemming from market volatility. Increase FY20-21 earnings by 2-3%. TP is raised from RM6.83 to RM7.87 based on 28x PE on FY20 EPS. Reaffirm BUY.

Share price performed, what next? Since our rating upgrade on Bursa from Hold to BUY on 12 Mar, share price has appreciated +25.6%, a significant outperformance vs KLCI (down -1.1%) over that horizon. Naturally, the question now is “has share price run its course or are there more legs to go?”. Our inclination is towards the latter.

ADV could hit a record high. 2020 has thus far been marred by several market negative events; US-Iran tensions (Jan), Covid-19 outbreak (Jan, still ongoing), domestic political shifts (Feb) and oil price plunge (Mar-Apr). Despite so, this boosted equities ADV, starting with selling pressures (Jan-Mar) and subsequent “bargain buying” (mid-Mar to current). YTD equities ADV has been robust with the number at RM2.62bn (FY19: RM1.93bn), increasing +25.9% YoY vs SPLY (i.e. Jan to mid-May 2019). If momentum sustains, 2020 ADV could very well trump the highs of 2017 (RM2.31bn) and 2018 (RM2.39bn). We expect a W-shaped trajectory for the market which intuitively, augurs well for ADV via heightened trading.

More retailers in the game. We note that retail participation in equities has risen to c.29.8% YTD vs 25% in 2019, not to mention an increase on a higher ADV base. This is positive for Bursa as it should result to higher overall implied rate earned on equities (i.e. equities revenue/ traded value) given the clearing fee (0.03%) cap at RM1k.

Higher volatility bodes well for ADC. Overall derivatives ADC has been strong with the Jan-Apr figure at 81k, a significant 69.4% YoY jump from 47.8k SPLY.

Forecast. We raise FY20-21 earnings by 2.9% and 2.0%. This follows from bumping up FY20/21 ADV to RM2.25/2.31bn (i.e. 3.6%/2.6% raise). When stacked against the YTD ADV figure of RM2.62bn, our assumption seems to have a conservative tilt. On back of strong ADV, we forecast Bursa to achieve record earnings this year.

Rerating to previous highs? Bursa currently trades at FY20-21 PE of 23.6x and 23.7x respectively. With earnings (and ADV) likely to hit an all-time high in FY20, it wouldn’t be too farfetched to envision Bursa’s PE rerating to its previous high of >30x, last seen in 3-4Q18. Also, if we use the valuation yardstick of Bursa’s market cap to ADV (monthly data), the ratio of 1.63x is at -1.5SD, suggesting inexpensiveness on this front (Figure #2). We view Bursa as a “circumstantial beneficiary” of Covid-19 via strong ADV stemming from market volatility; taking cue from the recent rally in share prices of rubber glove manufacturers (Covid-19 beneficiaries), perhaps a similar pattern for Bursa may pan out as well. Looking ahead, Bursa could very well benefit post-pandemic too, as ADV sustains on an eventual market recovery.

Maintain BUY, TP: RM7.87. Apart from the earnings increase, we also raise our PE target from 25x to 28x (tagged to FY20 EPS), resulting to a higher TP of RM7.87 (from RM6.83). The PE target is roughly +1.5SD above 5-year mean, justified by Bursa’s potential record ADV and earnings. In addition, we reckon that in the current market climate, Bursa deserves a “scarcity premium”, being one of the very few listed cos that are able to deliver earnings growth (FY20: +20.1% YoY) amid a global pandemic. We reaffirm our BUY rating on Bursa.

Source: Hong Leong Investment Bank Research - 18 May 2020