Today market is down! Finally, if not a lot of people must have forgotten that market can actually go down some days.
Despite this one day setback (half-day as I'm writing), I believe investors and traders alike must have realised that the market is getting hot. Yes KLCI has retreated below 1,740 but many forgot just end last year, we were hovering at 1,640. But naturally, some investors are getting worried, what if they wait and the market shoot up again? Or worse, what if they jump on the bandwagon and the counter just go down the slippery slope.
So is there a stock that can benefit regardless if the counters go up or down? Yes there is. And that’s Bursa Malaysia. If you are patient enough to read through this article, I will show you how it could potentially deliver 48% return or even >400% return (with higher risks of course).
What does Bursa do?
As most of us know, Bursa Malaysia is the only stock exchange in Malaysia. It charges clearing fees on the equity and derivatives trade. In addition, it also provides data subscription services, charges the listed companies listing fees, fees to review all those corporate proposals and of course IPOs.
1Q17 results will be fantastic
How would I know? Because market data tells me so. It's simple, in bullish markets, people trade more, Bursa earn more.
Bursa is one of the rare companies in which the key factor of its financial results is publicly available and updated real-time. Its key factor is the average daily trading value (ADV) of which clearing fees are charged. ADV multiplied by the number of trading days in that quarter and you can get a sense of its results. By now, 1Q17 is coming to an end and most data is already available.
As you can see, the ADV has been trending downwards last year as investors get jittery with equity markets and trade less. Our weak ringgit, government scandals, slowing economy coupled with geopolitical events like Brexit and Trump all spooked investors. But now in 2017, ADV is returning with a bang!
If you think that’s not impressive enough, look at the chart below.
The engine was not warmed up yet in Jan 2017 especially with all the year-end holidays and CNY. It was Feb and Mar that the ADV has truly exploded. In fact, last Friday alone RM5billion worth of stocks were traded.
How will this shape up for 1Q17 results?
I did a quick estimate and this is what came out.
Based on the estimate, Bursa 1Q17 EPS will be up by easily >25% yoy and qoq.
Just to be clear, Bursa has other revenue sources like derivatives and listing services. Derivatives trades have also inched up in 1Q but not as significantly as equities so to be conservative, I have taken the average derivatives revenue instead.
I also assume listing services fees to be same as historical average although logically it should also be higher as there are big IPOs this quarter like Serba Dinamik, Eco World International, small IPOs/RTOs like HLT, GFM, Rohas as well as large rights issue like IOI Properties.
Moreover, if you notice, the current clearing fees of 0.03% is actually subjected to a RM1,000 cap.That means whether someone trades RM3.33m or RM20m, he/she will still only be subject to RM1,000 clearing fees per trade. This obviously benefits the institutional investors and Bursa cannot fully capture the benefits of institutional trades. In other words, retail investors comparatively are considered higher margin customers. And retail investors have returned in droves in the last 2 months, which means for every RM1 traded, Bursa will get higher margin out of it.
So all in, 12c quarterly EPS can still be considered a conservative estimate.
So what about the remaining 3 quarters?
Can we annualised the 1Q17 results? If that’s the case, then Bursa 2017 EPS will be around 47-48c.
As you can see above, the ADV in 1Q17 was at around RM2.4b, mainly because market was still not hot in Jan 2017. By Mar, ADV has heated up to RM3b a day. If this has started since Jan, Bursa 1Q17 EPS will be 15% even higher at ~14c. If this is repeated across remaining 3 quarters, full year EPS will be more like 53-54c.
A sensitivity analysis of ADV and Bursa quarterly results can be seen below.
Like I highlighted above, these estimates have not yet even factored in the other potential positives factors.
But is the sentiment sustainable?
We can only make a smart guess. If you look at the links below, you can sense how the sentiment has turned.
I believe there are 2 main reasons behind the current bull run, return of foreign investors and election expectations.
As you saw from the links above, foreign investors have turned positive on Malaysia. In fact, they have actually turned more positive on emerging markets probably after they realised that despite Fed raising interest rates, emerging markets economies are still quite stable and there are still ample opportunities in their equities markets. Compared with US indexes which has soared since the Nov election, emerging markets look much more attractive now.
For our election, it is still widely expected to be somewhere after end-August (after conclusion of Ramadan, Hari Raya, SEA Games and Merdeka celebrations). Early this year, you already saw the run up of Genting Malaysia and Genting Berhad, then it was the rise of proxy stocks like GeorgeKent, Sime Darby, Ekovest, Iskandar Waterfront, MRCB, DRB, FGV etc. Rather than coincidence, I believe it is more like investors wanting to ride on the election wave. So if election sentiment continues, personally I think market could still remain hot, barring any negative surprises in regional or worldwide events.
Even if we assume the full year results is only at 1Q17 levels with ADV at RM2.4b per day, that’s already assuming market value will cool down more than 20% from its current level of >RM3b per day as well as ignoring the new IPOs coming on stream and renewed equity fund-raising and M&A activities. So I think a full year EPS range of 47-54c is not unreasonably optimistic.
What is a reasonable PE then?
Now that we have established that Bursa’s EPS could range from 47-54c, then what would be a reasonable PE for it? For starters, Bursa has been trading at forward PE of 22-23 times for past few years. Longer term, Bursa average PE is around 27 times.
High PE for stock exchange is understandable as it is a cash biz (strong cashflow generation), highly scalable in nature, minimal capex needed and is essentially a monopoly! You can trade through CIMB/Maybank/RHB etc but you will still end up paying Bursa.
When we look its peers PE such as Singapore Stock Exchange (24 times) and Hong Kong Stock Exchange (40 times) also helps to confirm that PE above 20 for such industry is not unreasonable.
Scaling the estimated EPS against the recent 23 times or historical average 27 times will get a fair value target of RM10.80-RM14.60, or an upside of 10%-48% from its current price.
As Bursa typical dividend payout is more than 90%, dividend yield is also likely to turn more attractive. With its strong cash generation ability and latest net cash per share of 57c stand by, it might even pay a special dividend again.
All in, Bursa is now an exciting stock again with the bullish market.
What will be the worst case scenario? That will be when the bullish run just snapped and Malaysia market go into hibernation mode again. That said, you still get a monopoly biz with net cash of 57c which pays decent dividend yield. Just as market won't stay hot forever, it also won't be cool forever. KLCI has struggled for the past 3 years and now with elections looming, market is expected to be active at least for the short to medium term, Bursa should be the go to stock if you want to ride this bullish wave without exposing yourself to those penny stocks.
Is the price tag of RM9+ going to be a problem? To be honest, i can never understand why people invest based on price. I always look at upside potential return, downside risk and decide how much investment can be placed with that company. Then the last thing is to divide by the share price to decide how many shares to buy. If KESM can go from RM6 to RM12, if Petron can limit up at RM4.50, then there's no reason you should only focus on penny stocks.
An even higher return, but higher risk proposition
Please ignore this section if you do not understand call warrants and its risks.
For those who have higher risk appetite, there are two call warrants, C10 and C11 available for Bursa. I do not recommend C10 as its expiry is too close (even though it’s at negative premium now). A better alternative would be C11 which expiry is at end-Nov, so plenty of time left. By then, at least 3Q results would be out.
A glance at the premium would show that it is currently trading at <1% premium. For those who have traded in company warrants or call warrants before, you would know that such low premium is not normal for warrants with still decent time to expiry. Looking at the price queues however, I think the premium is more of a reflection of the low liquidity, which causes the bid-ask spread to be wider than the normal 0.5 sen and the trades often does not quite capture its intrinsic value. While Bursa’s price has increased quite a fair bit over past week, I don’t think people have fully recognised its potential yet.
Upside vs downside
If we apply the above fair value target and warrants trading at different premium, we can get the following risk-return table. Again, if you do not understand warrants, please do not trade with it. Be responsible with your own investments and hope you can benefit from this bull market.
Created by Jay | Jun 16, 2019
Created by Jay | Nov 17, 2018
Created by Jay | Nov 05, 2018
Created by Jay | Oct 14, 2018
Created by Jay | Sep 20, 2017
Created by Jay | Jun 16, 2017
Created by Jay | Jun 08, 2017
Created by Jay | Jun 08, 2017
Created by Jay | Jan 26, 2017
Great article. What if interest rate rise? Will then justify a lower PE and bullishness no more...
the long term average PE of 27 times covers 2005-2016 (boom-bust cycle). before 2008 GFC, US interest rate was >5%, so I don't see much problem with interest rate rise impact on PE.
my gut feel is market will pay higher PE for Bursa when market is hot and vice versa
Jay nice article .: should write one for Petron also ..
Where do you derive the ADV data as Bursa's website doesnt seem to go back that far (eg Jan 17) and numbers dont seem to reconcile...referring to this news article - http://www.nst.com.my/news/2017/03/221256/analysts-bullish-bursa
Jay jay okacha!
actually Bursa disclose it everyday but they don't leave it on their website very long. my friend got this data for me from Bloomberg and at least for the last few days, it checks out alright.
if compared to those analyst figures, theirs is even higher (1.93 Jan, 2.53 Feb).For Mar, last week average was 3.4b/day so my figures are naturally higher since they only reported first 9 days of the month.
anyway, I'll stick to my source first unless proven otherwise (it's more conservative anyway). but thanks for pointing that out
volume cool down but value (RM2.7b) didn't drop as much. high volume low value usually means trading are focused on those penny stocks. yesterday was expected to be down anyway since US market were hit on Tuesday night. since US market up again overnight, Malaysia party to resume?
RM10 hurdle will be crossed anytime now, then who knows? sky's the limit
good analysis but market not agree with you.
well not sure how market needs to agree with me when C11 is already up 17% from the time of writing and don't forget bursa mother already ex dividend.
wow! Jay, I like your article