Merrill Lynch - Bursa; target now 5 !!

More downside from fee cuts and reduced trading velocity

􀂄 Multiple challenges ahead; maintain Sell We see three key challenges for Bursa Malaysia in 2008: (1) falling trading velocity on the Malaysian stock market, (2) introduction of a new clearing fee structure that we expect to be revenue-negative, and (3) potential P/E multiple compression as growth expectations get ratcheted down. M&A is a wild card for any exchange, but we do not think it is worth paying for. Merrill Lynch’s fair value for Bursa is RM5/share, translating to 13x FY08E P/E.
Trading velocity has slowed by 30% since early 2007 Equity trading activity peaked at an average RM2.8bn per day in 1Q07, but has slowed steadily since then. It currently averages just RM2.0bn per day. The increased political uncertainty in Malaysia following the general elections on 8 March could further depress market sentiment and stock-market turnover.

New clearing fees likely to be revenue-negative
We remain surprised by the analyst community’s lack of attention to the impact from cuts to regulated stock-market clearing fees that took effect 1 January 2008. The changes were announced in Malaysia’s Budget late last year. We believe that the net impact from the change in clearing fees will be revenue-negative. ML’s profit estimates 17%/18% below consensus in 08/09 We have lowered our average daily equity trading assumptions to RM2.0bn (from RM2.4bn) in FY08 and RM2.2bn (from RM2.7bn) in FY09 to reflect a much more subdued outlook for market turnover. This leaves our profit
estimates for Bursa at 17%/18% below consensus in FY08/09.