KEY INVESTMENT HIGHLIGHTS

• Bursa Malaysia buying remaining 25% stake in Bursa Derivative Group from CME Group for RM162.5m plus addons

• CME Group exercised put option

• Price seems a bit expensive

• Also, there were some revision of other agreements

• No material impact to financials

• Maintain NEUTRAL

Bursa Malaysia buying remaining stake in Derivative business. Bursa announced yesterday that it is acquiring the remaining 25% stake of in Bursa Derivatives Group from CME Group Strategic Investments LLC (CMEGSI). The acquisition includes Bursa Malaysia Derivatives Clearing Berhad, which is a wholly-owned subsidiary of Bursa Derivatives Bhd. The purchase consideration is the cash sum of RM162.47m and an additional sum which is to be determined later.

Maybe does not have a choice. We have to note however, that the acquisition was due to CME Group Inc (CME Group) exercising a put option. This was as per the Shareholders Agreement entered on 30 November 2009 when CME Group acquired the aforementioned 25% stake.

Consideration based on pre-agreed formula. The consideration for the acquisition was arrived at as of 31 March 2019 based on the preagreed valuation formula as defined in the Shareholders Agreement. This takes into consideration the EBITDA of Bursa Derivatives Group and the EV/EBITDA multiple of 17.8x, derived based on 12 listed exchanges. The additional sum will be based on the 25% of the 70% of Bursa Derivatives’ operating profit before tax for 2QFY19 and 3QFY19. We estimate this to be between circa RM3m to RM5m.

Seems a bit expensive. We opine that the acquisition price seems expensive judging by the difference of the CAGR of the derivative markets segment profit for the period 2009 to 2018 and the gains for CME Group. The derivative markets segment profit posted a CAGR of 6.8% (from RM27.1m to RM45.8m). Meanwhile, CME Group saw CAGR of 12.7% for its investment of RM55.6m in 2009 to the Bursa's acquisition price of RM162.47m. However, we are cognizant that exchange rate could play a factor and the purchase price is based on a pre-agreed formula.

Revision of other earlier agreements. There was also some variation on the collaboration agreements between Bursa and CME Group., Bursa Derivatives entered into an agreement with Chicago Mercantile Exchange Inc and CMEG Strategic Sdn Bhd on 18 September 2019 to vary the terms of the existing Globex Services Agreement (GSA). This includes the revision in the tiered fee structure for Globex services by CME, extension on the renewal from 3 years to 5 years (until 19 September 2025) with the option of successive renewal terms of 3 years and the extension of the termination notice period on non-renewal of the GSA from 18 months to 24 months. Bursa Derivatives also entered into a nonbinding Strategic Cooperation Agreement (SCA) with Chicago Mercantile Exchange Inc to explore new products and other business opportunities.

No problem with fulfilling the acquisition price. Bursa will not have any difficulties in fulfilling the acquisition price. We understand that the acquisition will be funded by the disposal of a portion of the quoted shares outside of Malaysia owned by Bursa. We noted that Bursa received 76,427 shares in CME Group Inc. as part of the consideration for the earlier 25% stake disposal to CME Group.

No material financial impact. We do not foresee any material impact of the acquisition to our forecast of Bursa's financial given that Bursa have already consolidated the earnings of Bursa Derivative Group. At most, we could see an additional RM8m to our FY20 forecast given that there cease to be any minority interest.

Slight tweak in forecast. With the acquisition, we tweak slightly our FY20 forecast by +3.8% upward.

Maintain NEUTRAL. We are neutral on the acquisition as we do not foresee any significant changes to the Bursa's earnings potential. This is due to the fact that Bursa Derivative was already a subsidiary of Bursa. While the acquisition price may seem expensive, the tradeoff is the extension of the GSA and the SCA. We believe that external events will continue to be a factor in Bursa’s earnings. We maintain our NEUTRAL call on Bursa with revised TP of RM6.50 (from RM6.90). Our TP is based on pegging FY20 EPS to a lower PER of 22x.

Source: MIDF Research - 19 Sept 2019