Version 9 Bloomberg: BURSA MK Reuters: BMYS.KL Refer to important disclosures at the end of this report Malaysia Equity Research 26 Oct 2017 BUY Last Traded Price ( 25 Oct 2017): RM10.02 (KLCI : 1,739.05) Price Target 12-mth : RM11.50 (15% upside) (Prev RM12.00) Shariah Compliant: No Analyst Malaysian Research Team +603 2604 3333; general@alliancedbs.com What s New 3Q/9MFY17 earnings in line; lifted by higher equity revenue Cut earnings by 2-5% across FY17-19F on lower guarantee fees on derivatives Anticipating a strong end to the year with a rebound in equity market turnover in 4Q17 Maintain BUY with lower TP of RM11.50 Price Relative 11.7 10.7 9.7 8.7 7.7 RM 6.7 82 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 473 530 545 557 EBITDA 295 340 357 374 Pre-tax Profit 271 315 333 351 Net Profit 194 225 238 251 Net Pft (Pre Ex.) 194 225 238 251 Net Pft Gth (Pre-ex) (%) (2.5) 16.1 5.7 5.4 EPS (sen) 36.1 41.9 44.3 46.7 EPS Pre Ex. (sen) 36.1 41.9 44.3 46.7 EPS Gth Pre Ex (%) (3) 16 6 5 Diluted EPS (sen) 36.1 41.9 44.3 46.7 Net DPS (sen) 34.0 54.5 41.7 44.0 BV Per Share (sen) 162 149 152 155 PE (X) 27.8 23.9 22.6 21.5 PE Pre Ex. (X) 27.8 23.9 22.6 21.5 P/Cash Flow (X) 26.6 8.8 7.5 6.4 EV/EBITDA (X) 12.0 9.6 7.8 5.9 Net Div Yield (%) 3.4 5.4 4.2 4.4 P/Book Value (X) 6.2 6.7 6.6 6.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.2 26.9 29.4 30.4 Earnings Rev (%): (2) (4) (5) Consensus EPS (sen): 41.2 42.7 44.7 Other Broker Recs: B: 3 S: 1 H: 10 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P. 222 202 182 162 142 122 102 Staying on the ride Awaiting a strong finish, reiterate BUY. (Bursa) s 3QFY17 earnings came in within expectations, boosted by higher equity revenue y-o-y, which mitigated the impact of lower derivatives revenue. Revenue increased by 10% to RM122.6m, led by a broad-based improvement. Cost-to-income ratio stayed beneath the 50% range. No dividend was declared, as expected. Cut earnings by 2-5% across FY17-19F as we take a more conservative stance on Bursa s derivatives segment. In tandem with Bursa plans to gradually reduce the guarantee fee rate imposed on margin for each contract s open position (target to reach 0% by 2020; 3Q17: 0.3% p.a.), we have zero-rised contribution from guarantee fees by 2019. That said, equity remains as Bursa s main earnings driver with c.50% revenue contribution. Although average daily value traded on the equity market subsided q-o-q, we expect a rebound in 4Q17 subsequent to the unveiling of the government s last budget this Friday, before calling for a general election that is due in 2018 Where we differ. Our earnings forecasts are more bullish than consensus by 1-4% across FY17-19F on stronger revenue assumption in light of the sustained market rally. Besides, our TP is also at the higher end of the consensus range, premised on our more optimistic long-term growth assumptions. Potential catalyst. Potential structural changes (revision in listing fees, revamp in fee structure and streamlining of its surveillance role) could unlock its earnings potential. Valuation: Maintain BUY with lower TP of RM11.50 (RM12.00 previously) post earnings adjustments. Our TP is based on the Dividend Discount Model and assumes 94% dividend payout (excluding special dividends) and 4.5% long-term growth, implying 26x FY18F EPS. The stock continues to provide a decent 4% yield. Key Risks to Our View: Market sentiment reversal. Our sensitivity analysis shows that every 10% decrease in average daily trading value assumption would lower FY18 net profit by c.5%. At A Glance Issued Capital (m shrs) 538 Mkt. Cap (RMm/US$m) 5,386 / 1,272 Major Shareholders (%) Kumpulan Wang Persaraan Diperbadankan (%) 19.8 Capital Market Development Fund (%) 18.7 EPF (%) 7.2 Free Float (%) 54.3 3m Avg. Daily Val (US$m) 2.0 ICB Industry : Financials / General Financial Refer to important disclosures at the end of this report ed: JS / sabc
WHAT S NEW Awaiting a strong finish What s New 3Q/9MFY17 earnings within expectations, boosted by higher equity revenue y-o-y. Meanwhile, derivative revenue declined on the back of softer trades in KLCI futures (lower volatility on both local and global equity markets) and a step down in guarantee fees (subsequent to Bursa s downward revision in 1Q17). Average daily contract volume traded was flattish y-oy and q-o-q. Revenue increased by a steady 10% from a broad-based improvement in depository fees, listing fees, Bursa Suq al-sila and member services fees. On a q-o-q basis, equity revenue was lower, in tandem with lower equity market turnover during the quarter. Cost-to-income ratio stayed beneath the 50% range. No dividend was declared, as expected. Outlook Toning down derivative revenue assumption. We lowered our forecast for derivative revenues, as we account for the gradual reduction in guarantee fee rate imposed on margin for each contract s open position (target to reach 0% by 2020; 3Q17: 0.3% p.a.). We have zero-rised contribution from guarantee fees by 2019, as a conservative estimate. This results in a decrease in our net profit forecasts for FY17-19F by 2%/4%/5%. Sustained market momentum. We maintain our full-year 2017 average daily volume and value trading assumptions for the equity market at 2.42bn shares and RM2.42bn respectively. We believe a more vibrant 4Q market turnover could be in store, subsequent to the unveiling of the government s last budget this Friday, before calling for a general election that is due in 2018. Valuation and recommendation Maintain BUY with lower TP of RM11.50 (previously RM12.00), after the cut in earnings. Our TP is based on the Dividend Discount Model and assumes 94% dividend payout (excluding special dividends) and 4.5% long-term growth, implying 26x FY18 EPS. Bursa generously pays out >90% of its net profits historically. The room for special dividend is dependent on Bursa s cash surplus management. Potential structural changes (revision in listing fees, revamp in fee structure and streamlining of its surveillance role) could unlock its earnings potential. Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Securities 51.3 71.6 56.2 9.6 (21.4) Derivatives 20.8 19.5 19.8 (4.8) 1.6 Stable 39.7 43.7 46.6 17.5 6.6 Total Revenue 111.8 134.8 122.6 9.7 (9.0) Operating expenses (57.8) (61.1) (59.1) 2.2 (3.3) Net Profit 44.0 59.5 51.6 17.2 (13.3) Market statistics Securities volume (bn) 1.8 2.9 2.0 Securities value (RM bn) 1.7 2.6 2.0 Derivatives volume (000) 56.5 57.5 56.8 Velocity (%) 26% 35 26 Source of all data: Company, AllianceDBS Page 2
CRITICAL DATA POINTS TO WATCH Critical Factors Revision in clearing fee. About 50% of Bursa s operating revenue consists of revenue from securities trading, the bulk of which comprises clearing fees. Bursa currently imposes a maximum cap of RM1,000 on its clearing fees which typically benefits institutional investors, due to their larger contract values. In our view, Bursa could lower clearing fees to promote retail participation while raising the RM1,000 cap to enhance revenue from institutional investors. A balancing act is required as higher transaction costs could reduce market participation (specifically from retail investors). 2539.2 2176.4 1813.7 1451.0 1088.2 725.5 362.7 0.0 2666.9 Average Daily Volume (m) 2416 2465 2514 1975 1666 Average Daily Value (RMm) 2539 2615 2416 Higher listing fees will boost Bursa s earnings. Revenue from derivatives trading comprises sub-20% of Bursa s operating revenue, with CPO Futures making up 80% of the total derivative volume traded in the bourse. Meanwhile, the remainder of Bursa s revenue is derived from other fee income such as listing fees, depository fees, and revenue from information services. Bursa s last revision in listing fees was in 2008 and is currently lower vis-à-vis its closest peer, Singapore Exchange (SGX). Although the timing of such a revision remains fluid, the exercise will indeed boost Bursa s earnings. Potential streamlining in regulatory watchdog role. This would be positive for Bursa as it could then redirect its time and resources to more revenue-generating activities, such as developing more initiatives to stimulate trading activities and velocity, promoting capital markets and raising the exchange s competitiveness in the ASEAN region. As duplications will be removed, we expect to see better cost efficiencies for Bursa. To further enhance retail participation, Bursa can offer incentives to encourage companies to voluntarily raise their free floats. For instance, by offering incentives for share splits and increasing minimum free float requirements, trading liquidity can be enhanced and Bursa will benefit from a broader and deeper securities market. In addition, the government has initiated the Mid and Small Cap Research Scheme (MidS) which is a two-year programme to enhance value discovery and tradability of under research stocks. This is aimed to educate and create awareness of an added pool of investible stocks listed on Bursa. A task force chaired by the Securities Commission will be overseeing the implementation of MidS. Proxy to Islamic banking growth as transactions on its commodity trading platform, Bursa Suq al-sila (BSAS) is expected to increase in conjunction with Islamic financing growth. Furthermore, BSAS global accreditation implies a potential to grow alongside global growth in Islamic financing rather than just domestically. 2133.5 1999 1812 1600.1 1066.8 533.4 0.0 Average Value/Volume 1.11 1.09 1.01 1 1.03 1.04 0.89 0.67 0.44 0.22 0.00 Velocity (%) 34.8 34.5 34.5 33.8 29.3 29.3 27.9 20.9 13.9 7.0 0.0 Revenue breakdown by segment 100% 90% 80% 35% 34% 35% 36% 33% 34% 34% 70% 60% 16% 15% 18% 15% 14% 13% 19% 50% 40% 30% 20% 49% 51% 48% 45% 51% 52% 53% 10% 0% 2013 2014 2015 2016 2017F 2018F 2019F Equity Derivatives Other operating revenue Source: Company, AllianceDBS Page 3
Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Company Guide Appendix 1: A look at Company's listed history what drives its share price? Average volume traded in equity market as critical factor RM Bursa share price (lhs) Avg volume traded (rhs) m shares 12.00 3,500 10.00 3,000 8.00 2,500 6.00 2,000 1,500 4.00 1,000 2.00 500 - - Remarks The average daily volume traded in equity market correlates positively with Bursa s share price with a correlation coefficient of 0.55. Higher volume turnover directly contributes to Bursa s top-line revenue growth. Source: Bloomberg Finance L.P, Department of Statistics Average value traded in equity market as critical factor RM Bursa share price (lhs) Avg value traded (rhs) RM m 12.00 3,000 10.00 2,500 Similarly, the average value traded in equity market demonstrates a positive correlation trend with Bursa s share price, keeping in mind that securities trading makes up c.50% of Bursa s revenue. 8.00 6.00 4.00 2.00-2,000 1,500 1,000 500 - Source: Bloomberg Finance L.P, Bank Negara Page 4
Balance Sheet: Net cash position. Bursa s net cash position is largely supported by its highly cash-generative business as an exchange operator. We do not foresee a change in this position as no major capex requirement is expected. 0.05 0.05 0.04 0.04 0.03 0.03 0.02 Leverage & Asset Turnover (x) 0.3 0.3 0.2 Lucrative dividend payout. Bursa generously pays out more than 90% of its net profit historically. Special dividends were paid out in 2013, 2014 and 2QFY17. The room for special dividend is dependent on Bursa s cash surplus management. 0.02 0.01 0.01 0.00 Gross Debt to Equity (LHS) Asset Turnover (RHS) 0.2 0.1 Share Price Drivers: Strong market volumes and values a boon for Bursa. Bursa is a good proxy to a sustained recovery in market volume and value. As long as the market is still flush with liquidity, greater market volatility on the back of a higher turnover rate is positive for Bursa s top-line performance. Key Risks: Sustainability of market liquidity. Bursa s earnings are reliant on market volumes and capital market activities, which are sentiment-driven and influenced by the direction of foreign fund flows. Negative market sentiments resulting in lower liquidity could dampen market volumes and values. Our sensitivity analysis shows that every 10% decrease in average daily trading value assumption would lower FY18 net profit by c.5%. Structural changes would take time to implement. The timing of approval for the aforementioned measures is still fluid and implementation may take time. RMm 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Capital Expenditure Capital Expenditure (-) ROE (%) Company Background is an exchange holding company principally involved in treasury management and the provision of management services to its subsidiaries which operate the securities exchange, derivatives exchange and depository and clearing house in Malaysia. (x) 27.9 25.9 23.9 Forward PE Band (x) +2sd: 20x +1sd: 17x 21.9 Avg: 22.2x -1sd: 10.9x 19.9-2sd: 7.8x 17.9 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 (x) 7.8 PB Band (x) 7.3 6.8 6.3 5.8 5.3 4.8 +2sd: 20x +1sd: 17x Avg: 5.68x -1sd: 10.9x -2sd: 7.8x 4.3 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Source: Company, AllianceDBS Page 5
Key Assumptions FY Dec Average Daily Volume (m) 1,975 1,667 2,416 2,465 2,514 Average Daily Value 1,999 1,812 2,416 2,539 2,615 Average Value/Volume 1.01 1.09 1.00 1.03 1.04 Velocity (%) 29.3 29.3 34.5 34.5 33.8 Segmental Breakdown FY Dec Revenues (RMm) Equity 233 213 271 285 294 Derivatives 86.2 88.7 81.2 76.7 72.9 Stable revenue 163 165 171 177 183 Other operating revenue 5.85 5.75 6.04 6.34 6.66 Equity market revenue main contributor to topline growth Total 488 473 530 545 557 Income Statement (RMm) FY Dec Revenue 488 473 530 545 557 Other Opng (Exp)/Inc (209) (202) (214) (212) (206) Operating Profit 279 271 315 333 351 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 279 271 315 333 351 Tax (72.3) (67.9) (79.8) (84.4) (88.9) Minority Interest (7.8) (9.0) (10.5) (11.1) (11.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 199 194 225 238 251 Net Profit before Except. 199 194 225 238 251 EBITDA 303 295 340 357 374 Growth Revenue Gth (%) 3.5 (3.1) 12.0 2.9 2.2 EBITDA Gth (%) 1.8 (2.5) 15.3 5.0 4.8 Opg Profit Gth (%) 2.6 (2.9) 16.5 5.7 5.4 Net Profit Gth (Pre-ex) (%) 0.2 (2.5) 16.1 5.7 5.4 Margins & Ratio Opg Profit Margin (%) 57.2 57.2 59.5 61.1 63.0 Net Profit Margin (%) 40.7 41.0 42.5 43.6 44.9 ROAE (%) 25.6 23.2 26.9 29.4 30.4 ROA (%) 10.6 8.6 8.7 8.0 7.1 ROCE (%) 24.9 22.9 26.5 28.5 29.2 Div Payout Ratio (%) 92.9 94.2 129.9 94.2 94.2 Net Interest Cover (x) NM NM NM NM NM Source: Company, AllianceDBS Page 6
Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 112 113 135 135 123 Other Oper. (Exp)/Inc (50.2) (43.6) (55.8) (53.2) (51.4) Operating Profit 61.6 69.0 78.9 81.6 71.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 (0.1) (0.1) (0.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 61.6 69.0 78.7 81.5 71.1 Tax (15.7) (16.6) (19.8) (20.5) (18.0) Minority Interest (1.9) (2.2) (2.3) (1.4) (1.5) Net Profit 44.0 50.2 56.6 59.5 51.6 Net profit bef Except. 44.0 50.2 56.6 59.5 51.6 EBITDA 61.6 69.0 78.9 81.6 71.2 Growth Revenue Gth (%) (8.6) 0.7 19.7 0.1 (9.0) EBITDA Gth (%) (11.3) 11.9 14.4 3.5 (12.7) Opg Profit Gth (%) (11.3) 11.9 14.4 3.5 (12.7) Net Profit Gth (Pre-ex) (%) (11.0) 13.9 12.9 5.1 (13.3) Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 55.1 61.3 58.6 60.5 58.1 Net Profit Margins (%) 39.4 44.6 42.0 44.2 42.1 Growth in equities revenue more than made up for the softer derivatives revenue Balance Sheet (RMm) FY Dec Net Fixed Assets 244 230 221 212 204 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 253 288 288 288 288 Cash & ST Invts 1,514 1,848 2,152 2,629 3,223 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 48.7 43.5 55.0 69.5 87.7 Other Current Assets 26.4 26.9 26.9 26.9 26.9 Total Assets 2,086 2,436 2,742 3,225 3,830 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 1,084 1,379 1,741 2,199 2,777 Other Current Liab 150 140 140 140 140 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 33.5 30.3 30.3 30.3 30.3 Shareholder s Equity 803 869 802 815 830 Minority Interests 16.0 18.3 28.8 39.9 51.6 Total Cap. & Liab. 2,086 2,436 2,742 3,225 3,830 Non-Cash Wkg. Capital (1,158) (1,448) (1,800) (2,243) (2,803) Net Cash/(Debt) 1,514 1,848 2,152 2,629 3,223 Debtors Turn (avg days) N/A N/A N/A N/A N/A Creditors Turn (avg days) N/A N/A N/A N/A N/A Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.3 0.2 0.2 0.2 0.2 Current Ratio (x) 1.3 1.3 1.2 1.2 1.1 Quick Ratio (x) 1.3 1.2 1.2 1.2 1.1 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 3.7 3.0 2.6 2.2 1.9 Source: Company, AllianceDBS Page 7
Cash Flow Statement (RMm) FY Dec Pre-Tax Profit 279 271 315 333 351 Dep. & Amort. 23.7 24.2 25.7 24.7 23.8 Tax Paid (77.7) (73.3) (79.8) (84.4) (88.9) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 0.0 0.0 351 443 560 Other Operating CF (8.8) (19.6) 0.0 0.0 0.0 Net Operating CF 216 202 612 717 846 Capital Exp.(net) (15.5) (10.9) (15.0) (15.0) (15.0) Other Invts.(net) (31.5) (29.6) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 70.3 (17.4) 0.0 0.0 0.0 Net Investing CF 23.3 (57.9) (15.0) (15.0) (15.0) Div Paid (184) (187) (292) (224) (236) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (5.8) (6.8) 0.0 0.0 0.0 Net Financing CF (190) (194) (292) (224) (236) Currency Adjustments 0.52 0.15 0.0 0.0 0.0 Chg in Cash 49.7 (50.0) 305 478 595 Opg CFPS (sen) 40.4 37.7 48.7 51.0 53.3 Free CFPS (sen) 37.5 35.6 111 131 155 Boosted by special dividend payout Source: Company, AllianceDBS Target Price & Ratings History 11.48 10.98 10.48 9.98 9.48 8.98 8.48 1 RM 2 3 4 5 8 6 7 9 S.No. Date of Report Closing Price 12-mth T arget Price Rating 1: 25 Oct 16 8.70 10.20 BUY 2: 05 Jan 17 8.88 10.20 BUY 3: 06 Feb 17 8.75 10.00 BUY 4: 20 Feb 17 8.82 10.00 BUY 5: 12 Apr 17 9.60 10.90 BUY 6: 27 Apr 17 10.08 10.90 BUY 7: 04 Jul 17 10.58 12.00 BUY 8: 05 Jul 17 10.48 12.00 BUY 9: 27 Jul 17 10.60 12.00 BUY 7.98 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: Malaysian Research Team Page 8
DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 9
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Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein. Wong Ming Tek, Executive Director Published by AllianceDBS Research Sdn Bhd (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia. Tel.: +603 2604 3333 Fax: +603 2604 3921 email : general@alliancedbs.com Page 10