Bursa Malayisa - Proxy for liquidity

Bursa Malayisa - Proxy for liquidity (Results Note)

Price: RM7.25
Target Price: RM9.30
Recommendation: BUY

· Bursa’s 1HFY09 net profit of RM50.5mn was inline with consensus estimates (48% of RM103.9mn) but below ours (36% of RM140.2mn). However, we are not changing our earning forecast as we believe 2HFY09 will contribute 60% of the group’s full year earning with capital market is now in bullish mood.

· Sharply higher 2Q09 on 142% higher Average Daily Trading Volume (ADT). Bursa reported strong 2Q results with PAT of RM35mn (+144%, QoQ). 2Q09 ADT of RM1.49bn jumped by +142% QoQ vs. 1Q's RM0.62bn. Retail participants have increased significantly by 37% for 1H09, bumping up clearing fees to 2.6bps and above (from 2.4bps in 1Q). As per guidance, management delivered its promise to maintain its interim dividend payout at 90%, that translates to 8.83 sen. Net margin improved by 17% to 51% from 34% previously, on the back of operational leverage

· A strong re-rating catalyst. Following our meeting with management recently, we discovered a major structural re-rating catalyst for Bursa. The exchange has submitted a proposal to the Ministry of Finance to remove the current cap on clearing fee charges on institutional trades (Now at RM1,000/trade). We believe this could potentially increase revenue by 15-20% which would translate to a 26% increase in our FY10 net profit estimate of RM163mn or EPS of 30.96sen. We are positive on management's move to remove the earlier ruling on the clearing fee cap which would rise back to 3bps (or 6bps in a two-way trade calculation) from 2.6bps currently. The group also proposed to reduce the minimum change on retailers to RM20 from RM40 currently.

· Only trading at 17.8x FY10 PER. Our sensitivity analysis on the potential downward revision of cap charges is shown below. At current share price of RM7.00, Bursa is trading at 18x-22x PER, which is at 19-33% discount to regional peers' average of 27x. An expected historically weak third quarter in the equity market could present opportunity to accumulate the stock, bearing in mind that the strong structural re-rating catalyst should limit the stock's downside and offer lucrative capital returns.

· We maintain our price target at RM9.30 based on 30x FY10 EPS of RM0.31/share. We are comfortable with target P/E of 30x (vs. Bursa historical average PER of 34x), with stronger ADT backed by the key catalysts of 1) global recession likely to bottoming out in 3Q09-4Q09; 2) corporate earning likely to surprise on the upside as consumer spending is recovering and 3) trading multiple likely to expand on better corporate earnings visibility.