Bursa’s long-term prospects intact

The myriad uncertainties and turbulence in global financial markets have certainly given investors cause to be nervous. Confidence remains fragile after the brutal equities meltdown. Although markets have since recouped some lost ground from recent lows, it remains unclear if the volatility is behind us.

Even if the selling tapers off, the severity of the credit crisis will have longer-term impact on underlying economies. The International Monetary Fund (IMF) forecasted global growth would slow to 3% in 2009 — its loose definition of a world recession.

There is certainly ample evidence that economic activities are slowing down rapidly. Central banks around the world, including the US Federal Reserve, China, South Korea, Australia and Hong Kong, have slashed interest rates in hopes of stimulating flagging growth.

We may not be able to get a clear reading on the world and domestic economies for some months yet as the impact of the credit crisis and the counter measures undertaken filters through. Hence, interest in stocks could remain relatively slow for some time beyond the immediate rebound.

Quarterly volume down since 1Q07

The average daily trading volume on Bursa Malaysia (RM5.35) has fallen every quarter since 1Q07. From an average of 2.04 billion shares traded in 1Q07, volume has fallen to 856 million in 1Q08, 520 million in 2Q08 and 392 million in 3Q08.

The precipitous decline has affect revenue for the stock exchange operator. Bursa’s revenue — which is driven primarily by clearing fees from equities and derivatives trading — has fallen by roughly 33% year-on-year (y-o-y) in the first nine months of the year.

Because of the nature of its business — most of the company’s costs are fixed and are not dependent on the level of trading activities — profits will fluctuate in outsized proportion to revenue changes.

As a result, net profit has more than halved over the same period, totaling just RM90.9 million compared to RM191.3 million in 9M2007. Net profit fell to just RM20.2 million in 3Q08.

Given prevailing uncertainties, market volume will likely remain low in 4Q08 and possibly into 1H09, at least. Daily market volume is estimated to average at about 550 million shares for 2008.

We are assuming a gradual recovery in the second half of next year. However, trading volume, on average, could still be flattish for the whole of 2009.

Similarly, the number of derivates contracts traded in 9M2008 was down some 4% y-o-y to 4.67 million. We estimate a slight pick-up of about 10% in 2009.

The economic slowdown would also likely lead to lesser number of new listings and other corporate manoeuvres, thus capping the stock exchange operator’s other operating revenue.

Profits down sharply in 2008

In all, we estimate net profit to fall by 55% to RM108.9 million in 2008 and stay relatively flattish at RM111 million in 2009. The sharp earnings contraction is reflected in Bursa’s share price, which has fallen from a high of RM16.90 this time last year.

Going forward, its performance will be inextricably linked to sentiment in the global financial market. In short, the stock will only recover when investor interest in the broader market picks up steam and sustains an upward momentum. Still, we believe longer-term investors should definitely consider accumulating Bursa shares ahead of the eventual recovery.

But remains on solid financial ground

Bursa remains on firm financial footing despite the sharp drop in earnings. The company continues to be profitable recurring and other (primarily interest income) incomes cover roughly 82% of operating expenses.

It has about RM383 million in available financial resources, of which about RM100 million is available for dividends. The company will stick to its minimal 90% dividend payout policy, although the payout quantum will be smaller in line with lower earnings.

We estimate dividends to total 20 sen per share in 2008-2009. That will give shareholders a decent yield of 3.7% at the current share price.

Despite the rough trading conditions, Bursa will push ahead with its various initiatives to attract more investors and companies, including foreign-based ones, to the local bourse. There are plans for more products such as multi-currency and thematic ETFs (exchange traded funds).

The company is slated to launch the new equity trading platform, which will enable direct market access, before year-end. In addition, Bursa will continue to explore strategic tie-ups and linkages with other stock market operators.

Source : The Edge Daily

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  1. I am hoping that the market will be more stable by mid 2009.

    It is a huge suprise why the world has gone into recession given that every country has become richer. India is rich, China has become the Tiger economy of the East, Malaysia and Singapore are richer than they were 10years ago.

    When l attended a Seminar in KL Hilton 2 years ago, some of the penalists have indicated about the volatility of the American economy. And many predicted that it will be hit with a huge financial crisis due to bad debts.

    Companies went into liquidation, debts were not paid, banks filed for bankrupcies and many more financial catastropy ensued. This was worsened by the rise in fuel prices consequently giving rise to high cost production.

    My question is: What is the connection between the American economy and the rest of the world. Why should we sneeze when America catch a cold. If America catch a cold let them suffer, we do not need to get affected. The Arab countries are mostly OPEC and they controlled the world oil market and production. The price of oil can be determined by OPEC and not by the American market.

    Individual countries can play their part to control the recession from worsening by cutting down on interest rates. Customer confidence has never been this low but l am hoping that the global financial crisis will pick itself up by 2010.

  2. to much of of speculation rather fundamental....so accept it. capitalism that how it works. few control the rest...that is what the illuminatist wants fom the rest. new world order...they speculate everything... all over the world ... intereseting isnt it.
    wat happen now was plan b4. only those unaware were the victim of those masters...beware in malaysia tooo...they will b in power soon.


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