The shares of Bursa Malaysia (Bursa) had a bullish run in January, rising 12.7% year-to-date leading up to its fourth quarter earnings announcement just yesterday. Bursa’s historical high net profit for 2020 was ahead of Macquarie Equities Research’s (MQ Research) already bullish expectations. In a report dated 3 February, MQ Research upgrades Bursa’s target price while maintaining Outperform.

Key Points

• Bursa’s historical high FY20 net profit (NP) of RM381m (+105% y/y) was 3%/5% ahead of MQ Research’s/consensus’ already bullish expectations.
• MQ Research upgrades FY21/22 NP by +16%/+9% on a buoyant market turnover outlook. Upgrade target price (TP) to RM10.60 (+15%), maintain Outperform (OP).
• Market turnover drivers are cyclical, unlikely to turn structural. MQ Research estimates tailwinds can sustain till end-2021. Discounted cashflow (DCF) based bear future value (FV) is RM6.20.

Conclusion

• MQ Research upgrades its FY21 market turnover outlook by +14%, which underpins its earnings and TP upgrades for Bursa. Equities turnover has remained robust to start the year, underpinned by persistent retail participation. As articulated in MQ Research’s recent semiconductors report, the low interest environment will continue to divert excess liquidity into the market. MQ Research’s KLCI target of 1,780 points also implies ~10% upside to gross market capitalisation. 30+ initial public offerings (IPO) in the pipeline could provide upside.
• That said, MQ Research acknowledges that Bursa’s earnings drivers are highly cyclical, and have low visibility. While the surge in new central depository system (CDS) accounts points to accelerating retail interest, it is unlikely to translate to structural change in market participation long term (LT). Note MQ Research’s dividend discount model (DDM) based bear FV of RM6.20. Thus, MQ Research prefers Singapore Exchange (SGX SP , S$9.92, Outperform, TP: S$11.50): more diversified earnings, structural over cyclical growth drivers. But MQ Research places Bursa ahead of Hong Kong Exchange (388 HK, HK$504.00, Neutral, TP: HK$500.00), which it recently downgraded.

4Q Results Takeaways

• 110% dividend payout was ahead of MQ Research’s/street expectations; MQ Research maintains its 100% payout forecast for FY21. Bursa incurred relatively high professional fees of RM14m (historical average: RM3m) in FY20 for IT-related work. Bursa also banked ~RM15m in pre-emptive tax provisions for changes to sales and services tax (SST), which affects digital services. Management indicated some confidence that the provision could be reversed upon appeal with authorities. The combined RM25m hit to earnings is one-off in nature, according to management.

Earnings and Target Price Revision

• MQ Research raises its FY21/22 NP by +16%/+9% on higher average daily value (ADV) assumptions. MQ Research maintains its valuation methodology of 18x FY21E enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), raising its TP to RM10.60 from RM9.20, maintain OP.

Price Catalyst

• 12-month price target: RM10.60 based on a EV/EBITDA methodology.
• Catalyst: 1Q20 results, IPO announcements.

Action and Recommendation

• MQ Research expects robust liquidity conditions will continue to support Bursa’s earnings outlook as well as valuations. A high dividend payout lends further support. Maintain OP. MQ Research’s bull case FV (19x EV/EBITDA, +30% ADV) is RM12.50.

12-month Target Price Methodology

• BURSA MK: RM10.60 based on a EV/EBITDA methodology
• SGX SP: S$11.50 based on a DDM methodology
• 388 HK: HK$500.00 based on a DDM methodology
• ASX AU: A$70.50 based on a DDM methodology

Source: Macquarie Research - 3 Feb 2021