We upgrade Bursa Malaysia to a BUY, as we raise our price target to RM12.00 (based on a 26x PER on 2018E EPS) following 15-16% earnings revisions on our 2018-19 forecasts. We anticipate an average daily value (ADV) of >RM3bn for the equity market in JanMar18 in the run-up to the General Election, after which it is likely to taper down to RM2.5bn-RM3bn in 2Q-4Q18. With the higher earnings expectation, special dividends are potentially on the cards in 2Q18 and 4Q18.

Sharp Surge in the Year-to-date Equity Trading Values

Bursa’s equity market performance so far in Jan18 has surprised us as it kickstarted the year strongly, registering an ADV of RM3.6bn for the first 16 days of trading vs. RM1.93bn in 1Q17 and RM2.67bn in 4Q17. We believe that the market is poised for a stronger re-rating in 2018 underpinned by inflows of foreign and domestic funds on expectations of a synchronized global economic recovery, a weaker US Dollar (firmer Ringgit) and an upcoming general election (driving thematic plays).

Bursa’s 4Q17 Net Profit Preview: Affin’s Projection at RM58.8m

Based on Bursa’s market data, we project a 4Q17 net profit of RM58.8m (and full year at RM226.6m), on a 4Q17 revenue forecast of RM134.4m (52.3% securities trading revenue, 13.3% derivatives trading revenue and 34.4% stable fee income). This is backed by a 4Q17 securities ADV of RM2.62bn (+19.4% qoq and +36% yoy) and derivatives ADC of 54.3k.

As Market Velocity Rises, Bursa Has Tendency to Trade Up +3SD

The securities market traded at an estimated velocity of 43.2% for the 16 trading days in January, a level we have not seen since the last bull run in 2007 (market velocity at 50%). Hence, if we were to extrapolate the ADV potential of the market today to 50%, this would imply a potential ADV of RM4.3bn and a blue-sky scenario price target of RM18.64 (at 29x PER on an EPS of 64.3 sen, in Fig 4, page 5).

Upgrade to BUY From HOLD. PT Raised to RM12.00 From RM10.30

We upgrade Bursa to BUY from HOLD, with a revised 12-month price target of RM12.00 (from RM10.30), on a 2018E PER of 26x (from 25.5x previously), as we revise up our 2018-19 earnings forecasts by 14.6%/ 15.9% on the back of revised securities market ADV assumptions of RM2.8bn and RM2.6bn for 2018E and 2019E while assumptions for derivatives market and stable fee income remain relatively unchanged.

Source: Affin Hwang Research - 26 Jan 2018