Our investment case on Bursa remains intact: (i) ADV for 2020 is on track for a record showing, (ii) high retail participation is good for rate earned on equities and (iii) high volatility augurs well for derivatives ADC. However, we took a relook at our ADV assumption (previously RM2.25bn) and felt that this could be on the conservative end given the YTD number of RM2.86bn. We raise FY20-21 earnings by 6-ish% with ADV assumption of RM2.41/2.47bn, still below the YTD sum. Reaffirm BUY with higher TP of RM8.95 (30x PE on FY20 EPS). With record earnings on the offing, PE rerating to a new high isn’t too farfetched.

Perhaps a revisit of numbers is warranted. Share price of Bursa recently surpassed our previous TP of RM7.87; this marks a generous 52.1% share price appreciation since our call was upgraded to BUY on 12 Mar (KLCI rose 5% over that same horizon). Our investment case on Bursa remains: (i) ADV for 2020 is on track for a record high; with a relatively high degree of operating leverage, this means that record earnings are on the cards, (ii) higher retail participation (YTD: 30.4% vs 2019: 24.7%) would result to a higher overall implied rate earned on eq uities given the clearing fee (0.03%) cap at RM1k and (iii) higher volatility bodes well for derivatives ADC. While the investment case is intact (if not further solidified), our earlier assumptions could possibly be on the conservative end, particularly on equities ADV.

ADV looks like it could hit a record high. ADV for May chalked in at astounding RM4.28bn; in recent recollection, this even surpassed the monthly high of May 2018 (during GE14) of RM3.62bn. On a YTD basis, ADV now stands at RM2.86bn. If sustained, this would very well trump the highs of 2017 (RM2.31bn) and 2018 (RM2.39bn).

What if the market corrects? Notably, the market has been “hot” with the KLCI rebounding 22% from its YTD low of 1,220 on 19 Mar. While there may be some degree of cautiousness of the market taking a possible correction given the rally, we would argue that this bodes well for Bursa’s ADV. In fact, we expect a W -shaped trajectory for the market which intuitively, augurs well for ADV via heightened trading.

Rerating to a new peak is not impossible. Bursa’s previous peak PE (slightly above 30x) occurred in 3-4Q18, this corresponded to both record ADV (RM2.39bn) and earnings (RM224m) that year. With ADV (and consequently earnings) charting a new high in FY20, it wouldn’t be too farfetched to envision Bursa’s PE rerating to surpass its previous high. We also view Bursa as a “circumstantial beneficiary” of Covid-19 via strong ADV stemming from market volatility; taking cue from the recent rally in share price of rubber glove manufacturers (Covid-19 beneficiaries), perhaps an upside bias for Bursa will continue to pan out as well.

Forecast. Raise FY20-21 earnings by 6.2-6.3%. This follows from bumping up FY20/21 ADV by 7.3% to RM2.41/2.47bn. Note that this is still below the YTD sum of RM2.86bn.

Maintain BUY, TP: RM8.95. Apart from the earnings increase, we also raise our PE target from 28x to 30x (tagged to FY20 EPS), resulting to a higher TP of RM8.95 (from RM7.87). The PE target corresponds to its previous high, 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: +27.5% YoY) amid a global pandemic. We reaffirm our BUY rating on Bursa.

Source: Hong Leong Investment Bank Research - 2 Jun 2020