Bursa’s  2Q14 results  met our and consensus estimates,  with earningsup 4% q-o-q due to cost control measures but down 15% y-o-y as 2Q13 was lifted by  strong  investor  sentiment  after  the  general  election  was concluded. A special DPS of 20 sen was declared on top of an interim DPS  of  16  sen,  which  should  be  well-received  by  investors.  Maintain BUY, with our FV revised to MYR9.10 (25x 2015 EPS) from MYR9.00.

2Q14 results within expectations.  Bursa  Malaysia (Bursa)  reported  a 2Q14 net profit of MYR47m (-15% y-o-y; +4% q-o-q), which was broadly within  expectations  with  1H14  net  profit  of  MYR92m  (-1%  y-o-y) accounting for 48% of our and consensus full-year estimates.

Results  highlights.  Average  daily  value  (ADV)  for  on-market  trades (OMT)  was  broadly  stable  q-o-q  at  MYR2.1bn  but  down  11%  y-o-y  –although  the  y-o-y  drop  was  not  too  surprising,  given  the  buoyant investor  sentiment  back  then  post  the  general  election.  The  effective clearing  fee  rate,  however,  was  down  slightly  to  2.3bps  vs  2.37bps  in 1Q14  (2Q13:  2.28bps),  which  we  believe  reflects  lower  retail participation.  Hence,  velocity  declined  to  29% in  2Q14, compared  with 30% in 1Q14 (2Q13:  37%). As for the derivatives market, average daily contracts  fell  12%  q-o-q  (+6%  y-o-y)  with  both  FTSE  Bursa  Malaysia KLCI  Futures  (FKLI)  and  Crude  Palm  Oil  Futures  (FCPO)  contract volumes down q-o-q.  Overall, total revenue was flat q-o-q but down 5% y-o-y  due  to  softer  securities  market  revenue.  On  the  flipside,  Bursa achieved positive jaws in 2Q14  thanks to lower other expenses (mainly lower  marketing  costs).  Its  cost-to-income  ratio  improved  to  46.6%  in 2Q14 from 49% in 1Q14 (2Q13: 40.7%). 

Dividends.  We  had  highlighted  the  possibility  of  further  special dividends previously and  Bursa  did not disappoint. A  special single-tier DPS of  20  sen  and an  interim  single-tier  DPS of 16  sen  were declared, similar to 2Q13.  We have included the special dividend in our forecast and  retained  our  recurring  dividend  payout  ratio  assumption  of  95%, which translates to a full-year net DPS of 53 sen (6.5% yield) for 2014.

Forecasts. We tweaked  down our  FY14F-FY15F  net profit forecasts  by 3% per annum after fine-tuning our ADV assumptions.

Valuation  and  recommendation.  Despite  the  earnings  revisions,  our FV  rises  to  MYR9.10  from  MYR9.00  as  we  roll  forward  valuations  to 2015. Our target P/E of 25x (5-year median) is unchanged. BUY.

Briefing highlights

IPO  pipeline  looks  interesting.  Management said its pipeline of IPO listings looks interesting and thinks that the amount raised in the primary market this year could, at least, match last year’s MYR8.2bn. While funds raised via IPOs in 2Q14 improved by 47% q-o-q and doubled y-o-y, management highlighted that the numbers would have been even better, if not for some listings that have been delayed to 2H14. 

Reaching  out  to  the  retail  segment  to  improve  velocity.  Bursa’s  managementhighlighted  various  initiatives  that  have  been  put  in  place  as  well  as  efforts undertaken in order to help improve retail participation, which stood at 25% in 1H14. These include promotion and marketing efforts, as well as the recent launch of Bursa Marketplace,  an online platform that provides investors with market information and trading  ideas  with  the  aim  of  growing  retail  participation.  There  are  currently  over 1,000 registered participants on the platform.

Special dividends  –  a  breather after this?  Bursa  did not  provide a  minimum level for its cash holdings in the briefing.  As at end-June, its cash pile was  at MYR375m(70  sen/share).  We  estimate  that  after  the  payment  of  the  special  and  interim dividends, Bursa’s (proforma) cash pile could  fall to MYR183m.  We had mentioned previously  our  understanding  that  the  cash  required  for  operations  and  capex  is about  MYR200m.  Hence,  while  we  laud  management’s  initiatives  to  return  excess cash to shareholders, we believe Bursa will now need some time to rebuild its cash pile. That said, its  recurring dividends still provide  investors with an attractive yield of about 4.3% per annum.

Forecasts
While 1H14 ADV of MYR2.06bn is close to our MYR2.15bn assumption for 2014, we note that 4Q tends to be a seasonally weaker period. Hence, we tweaked down our FY14F/FY15F  ADV  assumptions  to  MYR2bn/MYR2.15bn  from  MYR2.15bn/ MYR2.31bn  respectively.  Overall,  we  lowered  our  FY14F  and  FY15F  net  profit projections by 3% per annum.

Valuations and recommendation
Apart from the earnings revisions above, we  also rolled forward valuations to 2015. Our FV  rises  to  MYR9.10 from  MYR9.00. Our  target P/E of 25x (5-year median)  is unchanged.  Bursa  is  a  proxy  and  a  likely  beneficiary  of  the  ongoing  rollout  of  the Economic  Transformation  Programme,  in  our  view.  Meanwhile,  on  the  retail  front, macro factors look positive - thanks to the country’s young, growing workforce as well as high savings rate.  This could be further boosted if foreign retail participation picks up following the launch of the Asean Trading Link  – although we see this as a longerterm  positive.  Assuming  our  MYR2bn  ADV  assumption  is  achieved,  this  will  be Bursa’s strongest performance since 2007. Maintain BUY.

Source: RHB