Initiating Coverage on BURSA (1818) BURSA MALAYSIA BHD – Go With the Flows
Macquarie Equities Research (MQ Research) initiated coverage on the local bourse, Bursa Malaysia (Bursa) with an Outperform rating along with a street-high target price of RM10. MQ Research expects an estimated 100% dividend payout in 12 to 18 months, in tandem with Bursa’s windfall FY20/21E earnings, contributed by large trading volumes. MQ Research sees trading will remain robust for another 3-4 quarters before a rapid regression in FY22. Despite the trading halt on Thursday afternoon, Bursa closed the week on an upbeat note, rising 6.4% to RM9.15 last Friday.
Key Points
MQ Research initiates coverage of Bursa with an Outperform rating and RM10.00 target price (TP), underpinned by 56% YoY FY20E adjusted net profit (NP) growth
A play on elections/populist policies. MQ Research attributes record high retail participation to short selling ban, loan moratoria and cash handouts.
But, eyes o the exit. As volumes normalize (by FY22, MQ Research expects), so too will Bursa’s valuations. MQ Research dividend discount model (DDM) based floor valuation is RM5.85.
Amidst market-wide earnings/dividend contraction and downside risk in FY20/21, MQ Research thinks Bursa boasts an attractive combination of growth (+56% YoY NP), dividends (est. 100% payout) in the next 12-18 months. Initiate with Outperform.
Catch the high: Bursa headed for a record 2Q20
MQ Research believes Bursa is poised to deliver a record surge in earnings, with year-to-date (YTD) Securities Daily Average Value (SDAV) +52% YoY vs FY19, and YTD Derivatives Daily Average Volume (DDAV) of +38% vs FY19. MQ Research’s numbers assume another 3-4 quarters of robust trading volumes before a rapid regression in FY22; a relatively conservative assumption that leaves room for upside. Short-term volumes will remain robust due to: 1) short-selling ban until year-end; 2) cash handouts and loan moratoria driving retail liquidity; 3) pre/post-election flows (MQ Research thinks elections will be called late-Aug to early-Nov). Catalysts include short-selling ban extension, moratoria extensions, interest rate cuts, and cash handouts.
In tandem with the windfall earnings of FY20/21E, MQ Research expects Bursa will also declare 100% dividend payouts. The group’s >75% dividend policy sets the floor, but it has historically paid out over 90%. Relative to the 10-year MGS yields of 2.8% currently (falling further with another 25bps cut expected in 2H20), Bursa’s implied yield of 3.65%/2.92% for FY20/21E looks attractive. Regionally, Bursa also screens above average relative to global peer average returns of equity (ROE) of 15-17% (Bursa ROE: 35% in FY20E, 25% long-term average) and global peer average yields of ~2%. MQ Research’s FY20/21 forecasts are 27%/9% above consensus.
Monopolistic Incumbent
Like many other exchanges in the region, Bursa enjoys a monopolistic position as the sole authorised exchange. Coupled with a mostly fixed-cost business model (<25 a="" absent="" also="" amp="" and="" aspirations="" asset="" be="" believes="" beneficial="" br="" bursa="" but="" capex="" cash-generation="" coin="" competition="" compliant="" cost-to-income="" costs="" drive="" driving="" efficiency="" exchanges.="" existing="" expectations="" expensive="" financials="" for="" growth.="" growth="" guides="" higher="" highest="" historically="" if="" in="" instead="" into="" invest="" is="" it="" light="" listed="" m="" machine.="" malaysia.="" management="" more="" mq="" new="" next="" not="" of="" on="" one="" only="" opex="" other="" post-trading="" potentially="" procuring="" products="" proprietary="" r="" region="" relatively="" requirements="" research="" revenue="" robust="" segments.="" side="" sold-on="" stream="" syariah="" system="" systems="" that="" the="" three="" to="" underperformed="" upgrade="" variable="" via="" weakens="" will="" would="" years="">
Risks: But Leave Before the Party Ends
Historically, surges in trading volumes driven by market volatility are not sustainable, seldom lasting more than 12-18 months. This is already reflected in MQ Research’s forecasts. As volumes and earnings unwind through FY22, MQ Research anticipates Bursa could revert towards MQ Research’s highly conservative DDM-based valuation of RM5.85. Key risk: Bursa has little control over revenue drivers (SDAV/DDAV), which can rapidly decline.
12-month Target Price Methodology
BURSA MK: RM10.00 based on a discounted cash flow methodology
Source: Macquarie Research - 20 Jul 2020
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