Bursa ... Oct11

By InsiderAsia

- Strong growth in derivatives trading volume
- Equities trading volume holding up despite uncertainties
- Bursa remains good proxy for domestic economy
- Upgrade to BUY after recent price correction

Bursa Malaysia’s earnings results for 3QFYDec11 came in ahead of our expectations.
Revenue from both equities and derivatives trading were higher than our forecast. Trading revenue totaled RM62.3 million in 3Q11, up from RM58.4 million in the immediate preceding quarter – and accounted for roughly 65% of the company’s operating revenue.

Revenue from equities trading was higher q-q at RM48.9 million. Even though the daily trading volume was down slightly, to an average of 1.02 billion shares in 3Q11 from 1.04 billion shares in 2Q11, daily trading in value terms was higher at an average of RM1.89 billion compared with RM1.64 billion in 2Q11. This is attributed, in part, to a shift in investor focus to bigger capitalized stocks during the quarter.

Revenue from derivatives trading continued to trend higher, to RM13.6 million in 3Q11, up from RM13.4 million in 2Q11. The number of contracts traded daily rose to 34,169, on average, up from 32,316 in 2Q11 and well above the 25,111 transacted in 3Q10. For the first nine months of this year, a total of 6.33 million contracts were traded, compared with 6.15 million for the whole of 2010.

Bursa attributes the strong derivatives volume growth to improved accessibility and visibility of its products following the migration to the Globex trading platform in September 2010. The company is seeing new traders for its product offerings and believes that it is on target to hit 50,000 contracts daily by 2013.

The stronger derivatives trading volume was also likely due, in part, to heightened volatility in the cash market during the quarter, which would have prompted more price risk management and hedging activities.
Meanwhile, stable revenue in 3Q11 was flattish from the immediate preceding quarter at RM29 million. Stable revenue accounted for some 30% of Bursa’s total operating revenue during the quarter. Stable revenue
consists, primarily, of listing fees, fees for information and broker services as well as fees for depository services.

Non-operating revenue, primarily rental and interest income, increased to RM11.2 million in 3Q11, up from RM8.6 million in 2Q11. This was due, mainly, to the company’s stronger cash position as well as higher returns on investment.

In all, operating and non-operating revenue totaled RM107.3 million in 3Q11, up from RM101.1 million in 2Q11 and RM86.8 million in 3Q10. Operating expenses too increased by at a slightly slower pace than that for revenue. Depreciation was also lower following the cessation of accelerated depreciation for Bursa Trade Derivatives. As a result, net profit increased to RM38.6 million in 3Q11, compared with RM35.7 million in 2Q11 and RM27.7 million in 3Q10.

Outlook and Recommendation
Outlook for the global economy has deteriorated quite sharply over the past few months. Widening of the sovereign debt crisis in the euro zone and disagreements between member countries on the best course forward have further dented investor confidence.

The debt crisis is now threatening to engulf the bigger countries like Italy and Spain. Despite aggressive bond buying by the European Central Bank, yields on new issues by the most debt-laden countries have stayed high. This translates into additional burden on governments trying to bring down their debts. Expectations for a default by Greece are growing.

The resulting austerity programmes in Europe is starting to hurt. A gauge for manufacturing activities in the euro zone contracted in September, falling to the lowest level in more than two years.

The rest of the world is struggling to cope with uncertainties in Europe as well as slowing global demand. Growth in the US remains sluggish while that in emerging economies including China, Brazil and India is also cooling under tighter monetary policies.

The global economy appears likely to soften in 2012, which could translate into slower growth for corporate earnings – and lower expectations for stock gains.

Indeed, risk aversion has grown as uncertainties persisted – sending prices for a broad range of risky assets sharply lower as investors seek shelter in the safest of assets, the US dollar and treasury bonds. Even traditional havens, such as gold, were not spared in the global rout.

Emerging markets too came under heavy selling pressure. The FBM KLCI fell by more than 12% q-q in 3Q11, sending the benchmark index into negative territory for the year-to-date.
Sentiment and share prices rebounded somewhat in October, but visibility remains limited. Positively, the domestic economy should be relatively resilient, supported by domestic consumption and rollout of projects under the Economic Transformation Programme.

Nevertheless, we are assuming trading volume and value on the local bourse to average lower in 4Q11, compared with that in 3Q11 – and to remain slow in the early part of 2012 before picking up in the later part of the year. Thus, we forecast revenue from equities trading to be slightly lower next year, unless sentiment improves faster than expected.

We are however, assuming that the growth in the derivatives market will continue with rising visibility of the Bursa Malaysia Derivatives and its products on Globex. Bursa has been undertaking market awareness
programmes to promote its range of products to global investors.

The company is also pursuing the Dual Licensing Fast Track programme that would allow equity dealers to offer derivatives products. Additionally, Bursa is undertaking more roadshows to attract greater retail participation in the equities and derivatives markets, in both major and smaller cities across the nation.

Stronger revenue from derivatives is expected to offset the slightly lower revenue from equities in 2012.
We are revising up our net profit estimate for 2011 to RM145.3 million after taking into account the better-than-expected 3Q11 results. Net profit is forecast to improve slightly to RM146.1 million or 27.5 sen per share next year. That translates into forward P/E of roughly 23.1 times.

Bursa’s share price has corrected in line with the recent broader market sell off. The stock is now trading well below the year-high of RM9.02. In view of the lowered valuations, we are upgrading our recommendation from HOLD to BUY. We believe the stock should be among the first to rally in the event of a sustained turnaround for the global market.

The company remains financially sound and in a net cash position. It had resources available for use totaling RM547 million at end-September 2011. We estimate a final dividend of roughly 12.7 sen per share for 2011 to be announced in 4Q11, on top of an interim dividend of 13 sen per share that was paid in August.

Dividends are estimated to total 25.8 sen per share in 2012. This will earn shareholders a decent net yield of 4.1% at the current share price.