Macquarie Equities Research (MQ Research) released a report today (11 Sep) reiterating its Outperform rating on Bursa Malaysia (BURSA MK) as trading volumes within the Malaysian equity market remain highly elevated. Year-to-date securities daily average traded value (SDAV) hit RM3.97bn, 11% above MQ Research’s expectations and 86% higher than FY2019.

Conclusion

• Gloves stocks are in retreat and retailer participation is peaking. But as long as liquidity is abundant and volatility is elevated, MQ Research expects SDAV will continue to have the opportunity to surpass expectations. Recall, Bursa is a largely fixed-cost business with high transmission of revenue growth to the bottom line.

Impact

• Gloves wearing thin? MQ Research recently downgraded Top Glove, and the market has seen a sharp correction in prices for glove stocks. While gloves have been a driver for trading volume outperformance since 2Q20, MQ Research notes that gloves’ share of SDAV peaked in early August (at 39%) and has been on a decline as trading interest rotates to other sectors. Glove trading now makes up 30% of T30-day SDAV. In fact, if we strip out 90% of gloves’ value traded (reverting to pre-COVID levels), Bursa’s T30-day SDAV would still be RM4.6bn – still ~60% above pre-COVID levels.
• Retailer departure? Robust retail participation has arguably been the tail that wags the dog, in driving bullish momentum in the market and taking trading volumes to new peaks, now making up 41% of market participation. However, it should also be noted that while local institutional participation has held at around 46% - the result of a 60% increase in gross value traded vs pre-COVID. Stripping out post-COVID incremental retail participation would reduce SDAV by about 10%, assuming local institutional participation remains unchanged. Furthermore, MQ Research highlights that leverage levels appear to be relatively well contained based on both Bursa guidance and BNM data, with lending for the purpose of purchasing securities growing by only +2% year-on-year (y/y). This minimises the risk of a disorderly unwinding of retailers’ position due to margin calls.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM10.40 based on a EV/EBITDA methodology.
• Catalyst: 3Q20 results.

Action and Recommendation

• Reiterate OP on Bursa on +70% y/y FY20 Adjusted net profit (NP) riding on windfall SDAV driven by high liquidity and volatility in the market.

12-month Target Price Methodology

• BURSA MK: RM10.40 based on a EV/EBITDA methodology

Source: Macquarie Research - 11 Sept 2020