Bursa ... Feb12

- Strong growth in derivatives trading volume
- Equities trading volume held up despite uncertainties
- Bursa remains good proxy for domestic economy
- Renewed retail trading interest bodes well

Bursa Malaysia’s earnings results for 4QFYDec11 were right in line with our forecast.
Total turnover was lower, both y-y and q-q, at RM95.7 million in 4Q11. This was due, primarily, to lower average daily trading value (ADV) for the securities market amid heightened global uncertainties. Trading activities by foreign institutions were visibly lower with funds pulling out of risky emerging market assets. There were only two initial public offerings (IPO) in the last quarter, compared with a total of 26 in the first nine months of the year.

ADV for the period dropped to RM1.41 billion, down from RM2 billion in the previous corresponding quarter and RM1.89 billion in 3Q11. As a result, securities trading revenue was lower at RM40.3 million, compared with RM50.8 million in 4Q10 and RM48.9 million in 3Q11.

Positively, the derivatives market held up quite well. Derivatives trading revenue in 4Q11 was up 19% y-y to RM12.6 million on the back of higher average daily contracts traded (ADC). ADC rose to 34,779, up from 27,776 in 4Q10. This was attributed to increasing awareness and accessibility for investors following the migration to the Globex electronic trading platform. Some 2.12 million contracts were traded in 4Q11, up from 1.72 million in 4Q10.

Stable and other operating as well as interest income were up some 5% y-y to RM42.8 million in 4Q11. The amount combined was sufficient to cover all operating expenses during the period. Despite lower turnover, net profit was 5.2% higher y-y at RM31.3 million in 4Q11. Aside from slightly lower depreciation charges – following the full depreciation of the old derivatives trading platform – the effective tax rate was also lower at 26% compared with 36% in the previous corresponding quarter.

For the full-year, turnover was up 16.4% to RM420.1 million while net profit grew 29.3% to RM146.2 million. This was due, in part, to strong trading interest in global equities at the start of 2011. There were 28 IPOs last year, just one less than that in 2010. ADV for the year rose to RM1.788 billion compared with RM1.574 billion in 2010. Securities trading revenue totaled RM193 million, or roughly 51% of total operating revenue.

Derivatives trading revenue also grew strongly, to RM51.2 million from RM37.6 million in 2010. ADC rose to 34,747, up nearly 39% from the previous year’s average of 24,818 contracts daily. Contributions from the
segment accounted for about 13% of total operating revenue. Stable and other operating income grew some 9% y-y to RM137.1 million, accounting for the remaining 36% of Bursa’s total operating income of RM381.3 million. Other income, primarily interest income, was also higher at RM38.8 million from RM29.8 million in 2010.

Outlook and Recommendation
For the current year, Bursa intends to focus on rolling out strategies it has already laid a strong foundation for in 2011 under the company’s 3-year plan. For the securities market, the company will focus on improving liquidity and encourage greater retail participation. Bursa is undertaking more roadshows around the nation and in the region to promote the local bourse as an attractive investment destination. The number of day traders has risen from 36 to 58 over the past one year.

Despite reservations that global equities could see more volatility, equity markets have registered steady gains through the month of January. US markets had their best start to the year in 15 years while relevant bellwether
indices in key Asian markets closed sharply higher for the month.

Although the FBM KLCI bucked the uptrend to finish marginally lower in January, this was likely due to profit taking on key blue chips following the year-end surge. Overall sentiment stayed on a fairly even keel.
In particular, trading interest in lower liner stocks was quite robust with more than 1.82 billion shares transacted daily in January, valued at RM1.87 billion, on average. Trading volume spiked sharply higher in the first four trading days in February, with ADV touching RM2.94 billion.

The positive start has bolstered expectations for the rest of the year. Global stocks prices are being driven by data underlining a slow but steady improvement in the US economy in recent months. Most importantly, the job market appears to be on the mend, with unemployment falling to 8.3% in January, which is key to sustained consumer spending. The biggest worry is the ongoing sovereign debt crisis in the euro zone. If
events take a turn for the worst, they could cause havoc in financial markets and potentially derail the US and global economies.

Should, however, Europe manage to muddle through and data out of the US continues to be positive, rising investor confidence are likely to lift global stock prices higher. This would, in turn, boost interest on the local bourse. This is especially so with the higher than average amount of cash now believed to be sitting on the sidelines. The domestic economy should be relatively resilient, supported by both private consumption and public spending with the rollout of projects under the Economic Transformation Programme. On the other hand, speculations of an early general election and uncertainties over the results may temper any rally in the near to medium term.

On balance, we are assuming that securities trading revenue would average slightly lower than that in 2011.
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’s market awareness programmes to promote its range of products to global investors as well as easing entry requirements for local participants appear to be bearing fruits. It has implemented a fast-track programme for dual licensing to enhance the distribution channel and accessibility. The dual licensing allows equity dealers to offer derivatives products.

Bursa is planning to implement a new derivatives clearing system in 1H12 and introduce more features under the existing securities trade system to improve the overall system infrastructure. Meanwhile, the ASEAN Trading Link is slated to go live by mid-2012. Under the first phase, Bursa will link up with the Stock Exchange of Thailand and Singapore Stock Exchange for cross border trading.

Stronger revenue from derivatives and resilient stable and interest income are expected to more than offset the slightly lower revenue from securities in 2012. Net profit is forecast to improve marginally to RM147.6 million or 27.8 sen per share. That translates into forward P/E of roughly 27.4 times.

Bursa’s share price has gained more than 19% since our BUY recommendation in mid-October 2011. Nevertheless, its share price remains well below last year’s high of RM9.02. Thus, we are keeping our
recommendation on the stock in view of the better outlook for the global economy and more robust retail trading interest on the local market. We believe Bursa would be among the first blue chips to rally in the event of a sustained global economic improvement.

The company remains financially sound and in a net cash position. It had cash in bank some RM500 million at end-2011. Bursa proposed a final dividend of 13 sen per share, bringing total dividends to 26 sen per share for 2011 – or 95% profit payout. Assuming a similar payout, dividends are estimated at roughly 26.3 sen per
share in 2012. This will earn shareholders a decent net yield of 3.5% at the current share price.