Bursa's shares likely to consolidate

THERE were few surprises in Bursa Malaysia's (RM7.40) earnings results for the year ended December 2009 released last week.

The stock exchange operator reported net profit totalling RM177.6 million, including a one-off gain of RM76 million arising from the disposal of a 25% stake in Bursa Malaysia Derivatives to CME Group. Recall that the company engaged in a strategic tie-up with the latter last year. Excluding the gain, net profit declined a marginal 3% from the previous year.

Looking to grow derivatives business
With the equity sale — settled via cash consideration of RM1.9 million and 76,427 CME shares — completed in November 2009, the next step will involve the licensing of the right to use the settlement prices of its RM-denominated crude palm oil futures contact (FCPO) to the Chicago Mercantile Exchange, slated by 1Q10.

If all goes to plan, all existing derivatives products currently traded on the Bursa Trade Derivatives will be migrated to and traded on the CME Globex electronic trading platform by 2Q10.

Last year, a total of 6.1 million futures contracts were traded on the Bursa Trade Derivatives, or a daily average of about 24,749. Of this, roughly 65% consisted of the FCPO contracts while the KL Composite Index futures (FKLI) accounted for about 33% of the total. The company earned about RM38.5 million in trade fees, which accounted for 13% of its operating revenue.

Bursa is sanguine that the global exposure offered by CME's vast network of dealers and investors would significantly increase investor interest in the local derivatives products, especially the FCPO. The CME is the world's largest and most diverse derivatives marketplace.

Global commodity prices have registered increasing volatility in the past few years influenced by unpredictable and, often, extreme weather conditions as well as currency gyrations. Thus, we should see a tandem increase in the use of derivatives products as a hedging tool.

The company estimates that it could double the business volume for derivatives contracts within the next three years to about 12 million.

Equities trading volume may slow
On-market trading volume for the local bourse recorded a strong start in January 2010, averaging almost 1.32 billion shares daily — compared with the average of one billion shares traded daily in 2009.

Nevertheless, sentiment for global equities has turned more cautious of late. Unsurprisingly, our market volume has also fallen off in the past two weeks.

While most do not expect a double-dip recession for the global economy, there is growing anecdotal evidence that growth may slow in 2H10 amid high unemployment in the world's biggest economies. Stock market gains this year could be relatively tepid, especially compared to that in 2009.

Uncertainties will probably keep many investors sidelined, resulting in more modest trading volumes in the coming months. If so, Bursa's earnings growth will stay flattish this year. Fees from equities trading fee remain the company's biggest earnings generator, accounting for 47% of revenue in 2009.

On a positive note, Bursa expects the successful launch of the Direct Market Access for equities — that will allow trading anonymity and greater control over trade execution and strategy — last November to boost trading volume. Usage is expected to gain traction with the increase in number of terminals over the next few months.

It also expects a greater number of new listings this year, which should help generate investor interest. Some 20 companies have received approval for listing while another dozen or so applications are currently under review. By comparison, there were only 14 IPOs in 2009.

Strong cashflow and balance sheet
Bursa is expected to remain on solid financial footing. We estimate the company's stable income (which includes fees from listing, broker services, information services and depository services) and other income (primarily interest income) is sufficient to cover all operating expenses excluding depreciation. Bursa has some RM453 million in resources available for use at end-2009.

In view of the limited earnings growth prospects this year, Bursa's shares may stay range-bound in the near to medium term, until confidence in the global market strengthens again. The stock is trading at a relatively high 37.3 times our estimated earnings of 19.8 sen per share for 2010.

But shareholders should continue to receive dividends. Bursa is expected to maintain a high profit payout ratio. Assuming a similar payout ratio to 2009, of about 92%, we estimate dividends to total some 18.3 sen per share this year, giving shareholders a decent net yield of 2.5%.

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.