Bursa Malaysia Bhd
(Jan 28, RM5.78)
Maintain hold with a higher target price of RM6.29: The management shared with Bursa Malaysia Bhd’s soft average daily volume (ADV) — -19.8% year-on-year (y-o-y) in financial year 2019 (FY19) and month-to-date January 2020: a flat figure y-o-y — it will continue pursuing cost containing efforts. Headcount is the largest cost component for Bursa — 54% to 56% of total costs from FY14 to the nine months of financial year 2019 (9MFY19).

 
Bursa is looking at a flatter management structure; we reckoned this could result in a lower staff cost at its pyramid’s upper end. On this, recall in November 2019, Bursa announced four senior management personnels’ departure, with the chief commercial officer and chief operating officer roles permanently removed effective Jan 1, 2020. For 9MFY19, staff cost declined 4.7% y-o-y; we suspect there is space for a further reduction in FY20.

Discussions between Bursa and the Securities Commission Malaysia are still progressing, potentially involving transferring the regulatory function from the former to the latter; however, we’re sensing the status remains fluid.

If this materialises, Bursa could see significant cost savings as 21% to 23% of its headcount are involved in regulatory functions. Separately, discussions about public-listed companies to transition from quarterly to biannual reporting are still ongoing with a possible decision in the first quarter of 2020 (1Q20).

Earlier last week, Bursa introduced the world’s first options contract on palm olein. While we like the management’s efforts in bringing new derivative products to the market, an insignificant contribution from this options contract is likely in the near term. For perspective, the average daily contracts (ADC) of palm olein futures contract only made up about 1% of the derivatives ADC in FY19.

Results for 4QFY19 are due to be released on Jan 30. Judging from the trading statistics, revenue is likely to decline quarter-on-quarter (q-o-q) for 4Q given the ADV for equities down 3% and the Bursa Suq Al-Sila down 9%, partially offset by the derivatives ADC up 6.6%. With the full-year equities ADV and derivatives ADC achieving 101% and 99% of our FY19 assumptions, the results should be within our expectations, barring unexpected swings in the cost structure. Take note we have pencilled a q-o-q uptick in operating expense for 4Q, similar to the trend in the past two years.

Bursa has completed the acquisition of the remaining 25% stake in Bursa Malaysia Derivatives from CME Group for RM164.7 million. To fund this acquisition, Bursa had disposed of about 186,000 CME shares in November, raising RM159.3 million. The management guided it does not intend to sell anymore CME shares; it currently holds 196,000 shares valued at US$40.7 million (RM165.7 million).

While the overall trading statistics for FY19 are seemingly in line with our assumptions, we note the proportion of retail participation was higher y-o-y at 25%versus FY18’s 22%. This resulted in a higher rate earned by Bursa per value of trade. Our FY19 to FY21 earnings are raised 2% to 2.6% to reflect this. — Hong Leong Investment Bank Research, Jan 28