Company owner/directors, and major fund institutions heavily selling

Transcription

1 BURSA MALAYSIA BHD Analysis Date: /9/23 (BURSA) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios Financial Year: 22 3/2/22 Latest Quarter: 3/2/22 Price: 7.49 Stock Category: Large Capital Growing Overview Bursa Malaysia Berhad, an exchange holding company, provides exchange related services in Malaysia. The company operates an integrated exchange that offers a range of exchange related services, including trading, clearing, settlement, and depository services. Its products and services include equities, derivatives, Islamic offerings, offshore services, bonds, indices, information products, investment knowledge hub, central depository system accounts, consolidated central depository system statement of accounts, and securities borrowing and lending. The company also operates and maintains securities, derivatives, futures, options, and offshore financial exchanges; a clearing house for securities, derivatives, futures, and options exchanges; a central depository for securities listed on the securities exchange; an electronic trading platform for the bond market; and a Shari ah compliant commodity trading platform. In addition, it compiles, provides, and disseminates prices and other information relating to securities quoted on the securities and derivatives exchanges, as well as acts as a nominee for Bursa Malaysia Depository and receives securities on deposit or for safe custody or management. The company was formerly known as Kuala Lumpur Stock Exchange Berhad and changed its name to Bursa Malaysia Berhad in April 24. Bursa Malaysia Berhad was founded in 973 and is based in Kuala Lumpur, Malaysia. Board: Main Board FBMKLCI: NO Industry: FINANCIALS Sub Sector: STOCKBROKING AND RELATED SERVICES Ownership: Corporate Owned (Local) Investment Strategy Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Averaging Portfolio Execution: Buy and Monitor Basis for Buying: Basis for Selling: Company owner/directors, and major fund institutions heavily buying EPS QoQ Growth > 5% Price is below or around the fair price derived from EY% High Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad Long term trend changed from bullish to bearish Price is above or around the price derived from EY% Low Quarterly EPS drop for 3 consecutive months. The current price is 3% away from my average holding price. L. C. Chong Page of 3

2 Financial Performance 6% 5% 4% 3% Sustainable Profitability Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency ROE 5% 6.45% 6.82% 3.29%.68% 8% ROIC 5% 4.5% 39.52% 24.76%.6% 52% Both ROE and ROIC are above my benchmark. BURSA's invested capital is consistently flat, but its revenue and net profit are rela vely high based on the size of its invested capital. This is supported by its high net profit margin, which is around 4%! 2% % % ROE 2% 9% 3% 3% 4% 2% 3% 7% 7% ROIC 7% 8% 7% 52% 33% 27% 29% 4% 47% 5, Growth Quality.922 Rating: Very Good Result YoY % 3 Y % 5 Y % Y % Consistency Revenue.88% 7.97% 8.3% 53% 45, 4, 35, 3, EPS 3.64% 4.56% 5.5% 7% In overall, revenue and EPS are trending up. 25, 2, ,, , PAR Adjusted EPS Revenue Linear (PAR Adjusted EPS) Linear (Revenue) L. C. Chong Page 2 of 3

3 Healthy Cash Flow 6% 5% 4% 3% 2% % % % CROIC 3% 6% 23% 57% 27% 42% 3% 43% 43% CCC Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency CROIC 5% 4.76% 4.4%.65%.33% 46% CCC CCC Cash Conversion Cycle CROIC is above my benchmark. BURSA's invested capital is consistently flat, but its cash flow generation are relatively high based on the size of its invested capital. 45, 4, 35, 3, 25, 2, 5,, 5, 5, Cash Flow Growth Quality , 2, 5,, 5, 5, Rating: Average Result YoY 3 Y 5 Y Y Consistency Ops. Cash 6.3% 4.5% 3.58% % Owner 9.87% 6.63% 8.72% 68.44% 4% If just looking at the graphs, technically, growth of BURSA's cash flow is very inconsistent. However, if we drill down further, apparently since 29, BURSA changed its classification in working capital changes. For example, "Increase in trade margins", "Increase in TCP contributions to CGF", "Increase in CP contributions to DCF" are no longer available since 29. Another reason is reclassification in profit recognition due to change of accounting standard. If we just look at data, BURSA's cash flow grew at slow pace. Net Ops. Cash Owner Linear (Net Ops. Cash ) Linear ( Owner ) L. C. Chong Page 3 of 3

4 2% 5% % Sustainable Competitive Advantage Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency NPM % 37.87% 4.6% 6.66% 2.8% 4% FCF/Sales 5% 39.3% 37.7%.%.43% % NPM Net Profit Margin A picture is worth a thousand words 5% % 5% % NPM 2% 43% 42% 54% 36% 6% 34% 38% 39% FCF/Sales 5% 2% 58% 64% 2% 3% 38% 42% 38% Conservative Debt 5% 45% 4% 35% 3% 25% 2% 5% % 5% % FCF Cov. 3889% 436% 679% 6448% 26893% % % % % Debt/Equity 2% 32% 74% 85% 36% % 98% 9% 47% Quick R. 45% 299% 69% 5% 34% 42% 56% 66% 39% 8% 6% 4% 2% % 2% 4% 6% Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency FCF Cov. 5% 5% Debt/Eqty. < 2.22% 2.5% 2.26%.43% 67% % QR. % 5.26% 48.52% 5.9% 2.25% 52% FCF Cov. FCF Coverage Ratio; QR Quick Ratio No debt! Good! High Debt/Equity is caused by high Trade payables. Trade payables comprise security deposits, margins and collaterals which are derived from cash received from CPs of Bursa Malaysia Derivatives Clearing for their open interests in derivatives contracts. Collaterals are also lodged by TCPs of Bursa Malaysia Securi es Clearing for borrowings under the SBL framework. I think this is BURSA's nature of business. So, no problem. L. C. Chong Page 4 of 3

5 Economic Moats Cost Advantage BURSA is the one and only stock exchange in Malaysia. So, BURSA got % domination in the market. BURSA set the rules Switching Costs Like it or not, just live with BURSA. 6% 5% 4% 3% 2% % % Key Ratios for Economic Moats Network Effect The more people trading, the more money BURSA make. Just that simple Rating: % ROIC 7% 8% 7% 52% 33% 27% 29% 4% 47% CROIC 3% 6% 23% 57% 27% 42% 3% 43% 43% Wide Intangible Assets Like it or not, BURSA is the one and only stock exchange in Malaysia. So, BURSA got % domination in the market. Not available or no moat found Efficient Scale BURSA is the one and only stock exchange in Malaysia. So, BURSA got % domination in the market. BURSA set the rules L. C. Chong Page 5 of 3

6 Market Timing Discounted Cash Flows Valuation Refer Appendix 3 Y 5 Y Y Good % Base 6% Bad 2% Ugly 2% Good % Base 6% Bad 2% Ugly 2% Good % Base 6% Bad 2% Ugly 2% Fair Value Buy Under Actual M.O.S. 8% 29% 4% 54% 3% 28% 44% 62% 6% 27% 5% 79% Growth rate applied in Reverse DCF to reach the current stock price (7.49): 4% Refer Appendix 2 Excess Return Valuation (5 Y) (Banks Only) EY% Valuation Refer Appendix 3 Refer Appendix 4 Good Base Bad Ugly EY% High EY% Low Buffer R4Q EPS FY3 EPS* FY4 EPS* Fair Value % 2.88% % Buy Under Fair Value Actual M.O.S. 28% 242% 353% 452% Buy Under Sell Above Insider Trading EPS QoQ Growth Refer Appendix 5 (blank) Jun 2 Sep 2 Dec 2 Mar 3 Jun 3 QoQ % # Securities Price %. Comments Growth of BURSA cash flow is s ll not really consistent, so DCF is not suitable for it. BURSA is a cyclical stock. EY% valua on is suitable for BURSA. Based on EY% valua on, the fair value for FY4 is 3.22, and we have 43% of margin of safety. Besides, EPS QoQ growth is more than 4%. I will accumulate BURSA whenever possible. L. C. Chong Page 6 of 3

7 Notes Created Date Details Type Source Type 3/7/23 Bursa Malaysia On the right growth path Outlook Analyst Report At the end of last week, Bursa Malaysia Derivatives (BMD) announced that open interest for all its products achieved an all time high of 25,994 contracts (+8% YTD). In addition, Crude Palm Oil Futures (FCPO) the most liquid CPO contract in the world and the global CPO price benchmark hit a historical high of 2,29 contracts (+6% YTD). Previous peaks for all contracts and FCPO were reached in FY2 (24,65 and 73,649 respec vely). Open interest represents the total number of contracts at the end of each day that have not been closed out, exercised, or allowed to expire. A large open interest bodes well for Bursa as it means new money is flowing into the marketplace and more ac vity is taking place, which translates into greater liquidity. Liberalisation measures introduced to create a more facilitative trading environment and the launch of more tradable alternatives (eg. ETBS) ensure that the exchange remains competitive and moves it a step closer to being granted a developed market status by index provider FTSE. 9/7/23 A/R increases much faster than booking sales Red Flag The condition is not serious. From 27 onwards, BURSA's A/R range from 4, to 48,. 23/4/23 The reason I do not use DCF is FCF growth of BURSA is inconsistent. Besides, EPS growth is also very inconsistent, so I do Note not use Absolute P/E. However, the good thing is its EPS always move in a preditable range, so it is good to use EY % Oscillator. 23/4/23 Today, I have sold off some BURSA shares to grab some profits. Note 23/4/23 In the previous analysis, CROIC and ROIC was positive, which is not correct. This is because I didn't minus excess cash. In this analysis, I have corrected the formula. For Bursa, I don't see negative CROIC and ROIC as a bad thing because BURSA got huge reserved cash and BURSA doesn't need much cash to generate revenue. Basically, whoever performs transactions in market will automatically contribute some money to BURSA. Note 23/4/23 Q3 result in line; net profit grew 7% q o q led by strong trading values in equities and derivatives. Securities trading volumes and velocity were weak; current momentum may not be sustainable. Note Analyst Report L. C. Chong Page 7 of 3

8 Created Date Details Type Source Type /4/23 In terms of profitability, I see some growth in the past 5 years, but the growth rate is not impressive. Besides, ROIC is still nega ve even if it has been improving for the past 5 years. Besides, there is no growth in cash flow as well. Based on DCF s best scenario analysis, BURSA is very close to the fair value (7.25). Last year, I have sold around 35% of BURSA. I will sell off all of my positions in the next few months gradually. Note 4/2/23 Key poten al upside risks to our TP include: () a compression in risk premiums, (2) further pick up in velocity, (3) stronger than expected improvement in the deriva ves market, (4) further improvement in retail sen ments, and (5) return of foreign investors in full swing. Risk Analyst Report 4/2/23 We are positive on Bursa s outlook due to the various strategies and initiatives in place to build a more vibrant trading environment and compe ve market place by: ) facilita ng more tradable alterna ves, 2) reshape market structure and framework by liberalising the Deriva ves market membership structure, and 3) broaden regional trades via ASEAN Exchanges & ASEAN Link. These efforts in place should help bolster interests and boost trading ac vi es especially among foreign par cipants. Outlook Analyst Report L. C. Chong Page 8 of 3

9 Appendix Discounted Cash Flows Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.6% 3.99%.59% % 35% 4% 5% 2% 24% 9.5% 8% Growth Estimation Financial Figures Owner GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E YrE) % Shares Out. FCF Type 22 Owner Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 5% 2% 2% Owner % 6% 2% % Projection of Present Value and Fair Value Senario FV DPV 2, , ,35.75,998.6,97.87,84.8,766.83,568.56,49.92,47.2 PV 2, , ,92.7 3,8.2 3,2.95 3,6.5 3, ,99.3 3,5.74 3,3.38 Fair Value 3 Y: Y: 5.87 Y: 5.89 Base 6% Good % Bad 2% Ugly 2%% FV %DPV2, , , , , , ,27.93,928.,88.57,834.2 PV 3,53.5 3, , ,4.7 3, , , , , , Fair Value 3 Y: Y: 6.62 Y: 7.4 FV DPV 2,93.2 2,42.9,92.98,75.87,627.8,5.8,43.54,269.,74.76,87.43 PV 2, , , , , , , , , , Fair Value 3 Y: Y: 5.2 Y: 4.95 FV DPV 2,7.,885.82,687.76,529.9,372.69,232.29,6.24, PV 2, , , , , , , , , ,23.5 Fair Value 3 Y: Y: 4.6 Y: 4.9 L. C. Chong Page 9 of 3

10 Appendix 2 Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.6% 3.44%.4% % 35% 4% 8% 2% 24% Growth Estimation Financial Figures Owner GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E YrE) Shares Out. FCF Type 22 Owner Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 5% 2% Owner % 4% Projection of Present Value (GR. 4%) FV DPV 2,45.3 2, , , , , , , , , PV 3, ,46.7 3, , , ,2.8 4, , , ,497.4 Fair Value 3 Y: Y: 7.47 Y: 8.45 L. C. Chong Page of 3

11 Appendix 3 Excess Return Valuation Discount Rate Average risk Average Risk Unadjusted Business Risk Financial Risk Discount % premium free rate Discount % Factor Factor 7.6% 3.99%.59% % Margin of Safety Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 35% 4% 5% 2% 24% Financial Figures ROE Shares Out. 22 Book Value Dividend Payout Ratio Terminal % 7% % 3% Projection of Present Value and Fair Value Senario ROE 7% 7% 7% 7% 7% 7% Book Value Base Good Retained Excess Return PV Fair Value Y: 2.9 ROE 7% 2% 22% 24% 26% 27% Book Value Retained Excess Return ,59.69 PV Fair Value Y: 3.29 ROE 7% 6% 5% 4% 3% 3% Book Value Retained Excess Return (4.26) (96.45) PV (2.55) (5.79) Fair Value Y:.65 ROE 7% 5% 4% 2% % % Book Value Bad Ugly Retained Excess Return (.25) (3.4) (24.5) (323.8) PV (.97) (9.2) (4.67) (7.5) Fair Value Y:.36

12 Appenfix 4 EY% Valuation EY% High EY% Low Buffer R4Q EPS FY3 EPS* FY4 EPS* 5.4% 2.88% % Fair Value Buy Under Sell Above * Estimations from Reuters or local analysts' reports High EY% Green Zone EY% 5.4% R4Q FY3 FY4 Green Zone Price($) Price Low 4.92% Buy Under % Trading Range 2.27% 3.% Sell Above % Red Zone EY% 2.88% Red Zone Price($) Low High L. C. Chong Page 2 of 3

13 Appendix 5 Insider Trading Last 3 months or last 3 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted L. C. Chong Page 3 of 3