Despite coming into the new year with heightened caution, recent data suggest that the global economy, and in particular the US, is in better shape than initially expected. This has renewed investor confidence in riskier assets, sending global equity prices steadily higher.

The improved global outlook, coupled with a surge in retail participation in the domestic market, bodes well for stock exchange operator, Bursa Malaysia (RM7.25). Indeed, its shares have done quite well in the past few months. Still, with prices well below last year’s high of RM9.02, we suspect there is more upside to the stock. This is particularly so in the event of a sustained global economic improvement over the coming months.

4Q11 results in line with expectations
Bursa’s latest earnings results for 4QFY11 ended December were in line with our forecast. Total turnover was lower, both year-on-year (y-o-y) and quarter-on-quarter (q-o-q), at RM95.7 million in 4QFY11. This was primarily due to lower average daily trading value (ADV) for the securities market amid heightened global uncertainty. Trading by foreign institutions was visibly lower with funds pulling out of risky emerging market assets. There were only two IPOs in the last quarter, compared with a total of 26 in the first nine months of the year.

Positively, the derivatives market held up quite well. Derivatives trading revenue in 4QFY11 was up 19% y-o-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 4QFY10. 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 4QFY11, up from 1.72 million in 4QFY10.

Stable and other operating and interest income were up some 5% y-o-y to RM42.8 million in 4QFY11. The amount combined was sufficient to cover all operating expenses during the period.

Despite lower turnover, net profit was 5.2% higher y-o-y at RM31.3 million in 4QFY11. 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.

Building on last year’s foundations
For the current year, Bursa intends to focus on rolling out strategies it had already laid a strong foundation for in 2011 under the company’s three-year plan.

For the securities market, the company will focus on improving liquidity and encouraging greater retail participation. For instance, the number of day traders has risen from 36 to 58 over the past one year.

Bursa is undertaking more roadshows around the country and in the region to promote the local bourse as an attractive investment destination. The expected IPOs of big government-linked companies this year, such as Felda Global Ventures Bhd and Khazanah Nasional Bhd’s healthcare arm, will further enhance the breadth and depth of the local bourse.

Despite reservations that global equities could see more volatility, equity markets have registered steady gains through 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 stock 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 eurozone. If events take a turn for the worse, they could cause havoc in financial markets and potentially derail the US and global economies.

Should Europe manage to muddle through, however, and data out of the US continues to be positive, rising investor confidence is 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, speculation about an early general election and uncertainty over the results may temper any rally in the near to medium term.

On balance, we are assuming that securities trading revenue will average slightly lower than that in 2011.

On target to hit 50,000 contracts daily for derivatives trading

We are assuming that the growth in the derivatives market will continue with rising visibility of 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 fruit. It has implemented a fast-track programme for dual licensing to enhance the distribution channel and accessibility. 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 trading system to improve the overall infrastructure.

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 the Singapore Stock Exchange for cross border trading.

Marginally higher net profit forecast for 2012
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 a forward price-earnings ratio of roughly 26.7 times.

The company remains financially sound and in a net cash position. It had cash in banks of some RM500 million as at end-2011.

Bursa proposed a final dividend of 13 sen per share, bringing total dividends to 26 sen per share for 2011, a 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.


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.

This article appeared in The Edge Financial Daily, February 17, 2012.