Price: MYR7.83
12-Month Target Price: MYR9.30
• Bursa’s proposed partnership with CME Group Inc. is aimed at globalizing the Malaysian crude palm oil futures (FCPO) market. The proposed collaboration involves CME Group taking a 25% stake in Bursa Malaysia Derivatives for MYR55.6 mln. Bursa will receive MYR1.9 mln in cash and 76,427 CME Group shares.
• CME will have the right to use the settlement prices of the MYRdenominated CPO futures contract to develop USD-denominated cash-settled CPO futures contracts for listing on the CME Globex trading platform. This listing is expected to take place in mid-2010 and Bursa is expected to list all its derivatives products on the CME Globex trading platform in 2H10.
• While the new product may cannibalize Bursa’s existing derivative business initially, we expect Bursa to benefit from the proposed tie-up in the long term from a wider reach. The benefits include: (i) more arbitraging activities with other futures contracts available on CME Globex (such as soy oil) and (ii) the wider network of one million dealers on CME Globex compared to Bursa’s 600 dealers. Management expects the new trading system for derivatives to potentially double the daily volume from the current average of 26,000 contracts in three years’ time. Trading revenue in derivatives accounted for 14.9% of Bursa’s operating revenue in 1H09.
• We maintain our Buy recommendation with a higher 12-month target price of MYR9.30 (from MYR8.50). The raised target price reflects higher peer valuations. Our positive view on the stock is also premised on its relative underperformance compared with its regional peers. Singapore Exchange (SGX SP, SGD8.62, Not Ranked) and Hong Kong Exchanges and Clearing (HKEx) (00388, HKD149.20, Hold) are both trading at the average of their historical highs.
• We value Bursa on 32x (from 29x) projected 2010 EPS. The assigned PER is in line with the HKEx and represents a 30% discount from Bursa’s average historical high. We feel a discount is warranted, given our view that the current equity market recovery is somewhat fragile.
• Risks to our recommendation and target price include a drop-off in trading activity if markets turn against investors following the strength of the recent rally. This may be triggered by inflation concerns and slower-than-expected recovery in corporate earnings.
• We expect limited earnings impact in the near term so we leave our 2009 and 2010 net profit forecasts unchanged. Earnings should be driven primarily by a pick-up in trading activity. 2008-2010 EPS CAGR of 19% comes on our assumption for daily turnover value to reach MYR1.5 bln and MYR1.8 bln in 2009 and 2010, respectively.
Summary: Bursa Malaysia (Bursa) operates the only exchanges in Malaysia. The exchanges comprise Bursa Malaysia Securities, Bursa Malaysia Derivatives and the Labuan International Financial Exchange. The stock is a component of the FBM70 and FBMEMAS.
By Standard & Poors
Analyst: Ai Lien Ng
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