Bursa Malaysia

Bursa’s 1Q08 net profit dropped 40% YoY to MYR42.1 mln. The weaker performance was expected due to the lackluster market during the period. The average daily turnover (ADT) for equities declined 26.9% to MYR1.9 bln with a lower turnover velocity of 46% versus
68% in 1Q07. Trading revenue declined 38.7% YoY to MYR61.1 mln.

Stable revenue (income that isn’t directly affected by market turnover) rose 14.7% YoY to MYR26.4 mln mainly on higher listing fees due to the full effect of the fee revision (the full charge started on Jan. 1, 2008).

Total expenses increased 11% YoY (in line with our forecast) because of higher staff costs (due to increased ESOS expenses and annual increments) and depreciation expenses (due to capex spending to upgrade its IT systems and renovate its premises for new tenants).

We have fine-tuned our forecast and lowered our projected 2008-2009 net profit by 3%-4%. Current global market uncertainties and to a certain extent, political developments in the country may keep ADT low in the near term. Our expected earnings recovery will be supported by:
(i) a growth in derivatives turnover with the recent launch of direct market access (DMA) for derivatives and introduction of new derivatives products;
(ii) an introduction of DMA for equity (after
DMA for derivatives stabilized) should help to improve turnover velocity; and
(ii) potentially higher new listings driven by the Securities Commission’s recent relaxation of listing requirements. We maintain our Hold call on Bursa. Given the minimal revisions to our forecasts, our 12-month target price is unchanged at MYR10.00.

The target price is based on a PER of 22x on 2008 earnings and includes our projected dividend for the year. The accorded PER is at a discount to our target multiple of 25.6x for Hong Kong Stock Exchanges and Clearing (00388 HK, HK$148.00, Buy).

While near-term earnings outlook could be cloudy, the stock offers a decent dividend yield. Bursa has maintained a dividend payout of 91%-92% (excluding special dividends) over the past three years and we expect the ratio to be sustained in view of its small capex needs and strong cash position.

Risks to our recommendation and target price include a prolonged consolidation in equity market conditions, which may necessitate further reduction to our projected market turnover and turnover velocity, as Bursa’s performance is highly dependent on market sentiment.