SHARES of Bursa Malaysia (RM5.95) have done fairly well in the year to date, gaining 15.5%, on the back of improved sentiment for global equities. Stock markets around the world have rallied, chalking up double-digit gains, since hitting multi-year lows in early March.

Trading volume on the local bourse also picked up in recent weeks. From an average daily on-market trading volume of about 410 million shares in the first quarter of 2009 (1Q09), volume hit a high of over 2.08 billion shares on April 24. The daily market volume averaged well over one billion shares so far this month.

Much of the interest was focused on lower liner stocks. But Bursa shares too received more than its fair share of investor interest. The company's revenue is closely tied to market volume. Hence, if the current rally is sustainable, Bursa will be among the first companies to enjoy an earnings turnaround. We are positive on the company's longer-term prospects.

Lower profits in 1Q09 on volume decline
Bursa reported sharply lower earnings results in 1Q09 due to shrinking volumes in the trading of both equities and derivatives. Net profit tumbled 63% year-on-year (y-o-y) to RM15.5 million.

Trading revenue from equities dropped 60% y-o-y to RM19.5 million on the back of a 52% contraction in the average daily trading volume. Interest in the KLCI futures (FKLI) was also weak falling 42% y-o-y - many investors were sidelined what with the clouded outlook for the broader market.

Even though trading in crude palm oil futures (FCPO) held up well, the daily number of derivatives contracts traded dropped 21% y-o-y to about 23,862 in 1Q09. As a result, trading revenue from derivatives was 23% lower y-o-y at RM9.4 million.

But stable income can cover bulk of operating costs
On the positive note, Bursa managed to keep a lid on operating costs, which declined by about 16% y-o-y. The company is targeting to slash about 15% off its budgeted operating expenses for the year as well as prioritise its capital expenditure. Stable and other incomes, including interests, were sufficient to almost cover all the company's operating expenses in 1Q09. Hence, Bursa is expected to remain comfortably in the black through the difficult operating environment.

Maintaining high dividend payout
Bursa is sitting on about RM431 million in financial resources available for use, of which about one-third should be freely distributable as dividends. This is after excluding requirements for working capital, security deposits and margins as well as clearing guarantee fund contributions.

Thus, the company is expected to maintain a high dividend payout ratio. We estimate dividends to total 19.2 sen per share in 2009, which will give shareholders a decent gross yield of about 3.2%.

Is the rally sustainable?
The current rally has been strong and gains steep, bolstered by the substantial liquidity sitting on the sidelines. Investors dumped stocks in the previous few months driven by extreme fear and volatility in the markets. But with loose monetary policy adopted by almost every major central bank around the world, it is inevitable that investors will start to seek better returns than holding cash. And heavily bashed down equities is an attractive option.

The rally was justified by a sprinkling of upbeat data that suggests the pace of global economic deterioration is slowing. For instance, the US reported improved housing starts and sales while March exports for most Asian economies were contracting at a slower pace. Having said that, there remains a high degree of scepticism as to whether the current rally is sustainable or if markets are being set up for a steeper fall.

The global economy remains in poor health. The IMF (International Monetary Fund) estimates that the global writedowns by banks and financial institutions could reach US$4.1 trillion (RM14.8 trillion), of which only about one-third of that amount has been written down, so far.

If true, the global financial woes, which triggered the current recession, may be far from over. Banks could be hit by more loan loss provisions in the coming months and require fresh capital injection. This may derail the resumption of normal lending activities, which is key to the broader economic recovery.

Although corporate earnings for 1Q09 were, by and large, better than expectations, those expectations have been marked way low. Even if the global economy is heading towards a bottom, many believe the recovery will be slow and long.

In short, Bursa's earnings remain susceptible to volatile market sentiment. But the company can leverage on its strong underlying fundamentals to continue building its business franchise and keep the local bourse relevant in the global market place. Indeed, Bursa has a busy calendar for the rest of the year.

To create niche in commodity and Islamic markets
For starters, the company intends to exploit the country's position as the world's second largest palm oil producer and pioneer in Islamic finance to carve a niche in the commodities and Islamic market.

It is planning to set up Bursa Commodity House (previously known as Commodity Murabahah House) - a spot commodity market to facilitate Islamic financing based on the Murabahah concept - as a new source of revenue. The new platform should be up and running in the second half of 2009 (2H09). 

Bursa is also set to launch a series of thematic indices, including two palm oil plantation indices comprising key companies listed on the local bourse as well as in the region. Plus, the new FTSE Bursa Malaysia KLCI is slated for launch in early July 2009, to replace the existing KL Composite Index.

All the indices are created in collaboration with the FTSE Group using internationally accepted methodology for free float and liquidity, which will enhance their quality and appeal to foreign investors.

Promote new products to improve liquidity
This is, in turn, hoped to spur the creation of more new index linked products such as structured warrants and ETFs (Exchange Traded Funds) - to increase the breadth and depth as well as liquidity in our market.

An ETF is an instrument representing a basket of stocks designed to track the performance of the underlying index. It offers investors all the benefits of diversification, is cheaper and easier to buy/sell compared to unit trusts.

There are currently several listed ETFs on the local bourse, such as the FBM30etf and MyETF Dow Jones Islamic Market Malaysia Titans 25. Trading volume of these products has been somewhat muted, so far, perhaps because they are still relatively "foreign" to many retail investors. But interest should improve with time, as more investors are educated on their advantages. Bursa will continue to organise roadshows and conferences for local and foreign investors.

Improve accessibility and efficiency
Part of Bursa's strategy is also to make trading on the local bourse more accessible, easier and faster, to widen its appeal to new categories of investors.

For instance, the new Bursa Trade Securities platform, which went online in December 2008, allows for faster execution and can handle greater trading volume. It also paves the way for Direct Market Access (DMA), which enables trading anonymity and greater control over trade execution and strategy.

Direct Market Access for the derivatives market was launched in April 2008 and has since garnered good response. Currently, DMA accounts for about 20% of the total derivatives contracts traded. DMA for equities is slated for 2H09.

The merging of the Main and Second Boards is also targeted for 2H09. The unified board will list companies with established profit track record. At the same time, the Mesdaq board will be transformed into a sponsor-driven market, open to emerging companies from all sectors. The aim is to make Bursa Malaysia a more attractive listing destination for local as well as foreign companies.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.