Bursa-CME tie-up positive but impact not quantifiable for now

Tags: Brokers Call | Bursa Malaysia Bhd | CME | Maybank IB

Written by Financial Daily
Wednesday, 23 September 2009 11:09

MAYBANK Investment Bank (Maybank IB) said BURSA MALAYSIA BHD []’s proposed collaboration with the Chicago Mercantile Exchange (CME) Group for derivative products is positive for the internationalisation of Malaysian crude palm oil (CPO).

It will also lift Malaysian derivative product recognition to a global level, it said.

“However, the earnings impact is not quantifiable, and we believe the recent strength in Bursa’s share price has fully reflected the long-term benefits. We retain our earnings forecasts, and RM5 target price,” it said in maintaining its sell recommendation on the stock at RM7.83.

The strategic collaboration involves Bursa Malaysia Derivatives (BMD) granting CME a right to use the settlement prices of BMD’s ringgit-denominated CPO futures contract (FCPO), to enable CME to develop US dollar-denominated CPO futures contract (UCPO) and options for trading on the CME Globex trading platform.

It also includes CME providing the services of the CME Globex trading platform to BMD, including the listing and trading of all existing and future BMD’s products on the CME Globex trading platform; and CME taking on a 25% equity stake in BMD.

Maybank IB said the collaboration would provide Malaysian CPO futures with a larger and more vibrant trading platform in the US.

This would also lead to the recognition of Malaysian CPO as an international pricing benchmark for edible oil contracts, thus the internationalisation of Malaysian CPO, it said.

“Bursa itself should gain from the opportunity to develop new derivatives with CME. CME’s 25% stake in BMD strengthens its commitment,” it said. The research house said the full-year impact from the collaboration would only be felt from 2011 onwards.

Bursa would derive a fee revenue from CME for the right to use its FCPO, but it has to pay a fee for the use of CME Globex trading platform. These fees will be based on the trading volume of the derivatives, it said.

“The extent of earnings impact depends on the investment cycle of the underlying ‘assets’ for the derivatives. ‘Leakage’ of BMD’s profits to minority (i.e. to CME) will be small for the interim based on BMD’s RM9.7 million net profit (9% of Bursa group’s) in 2008.

“For the immediate term, BMD’s stake sale would result in a RM44 million gain (eight sen per share) for Bursa. We retain our earnings forecasts for now, it said.

Maybank IB said the collaboration between CME and Bursa will reaffirm Bursa CPO derivatives as the global benchmark for CPO trade.

Given the different time zones for these bourses (in Malaysia and US), CPO may now be traded round the clock, it said.

“The trading of CPO on CME and US dollar-denomination is likely to inject more interest in the commodity and result in increased price volatility over time.

“This may also allow CPO price to exhibit stronger positive correlations with crude oil and soybean oil over time,” it said.

Bursa surged 17 sen to close at RM8 last Friday.


This article appeared in The Edge Financial Daily, September 23, 2009.