Bursa surprises with special dividends

by **Cals** Mon 22 Jul 2013, 11:03

Bursa surprises with special dividends
Business & Markets 2013
Written by Insider Asia
Monday, 22 July 2013 10:36

Stock exchange operator BURSA MALAYSIA BHD [] (RM8.28) rewarded shareholders with special dividends after reporting its strongest quarterly results since the global financial crisis. Net profit for the second quarter of 2013 (2Q13) rose to RM54.8 million, up 44% year-on-year (y-o-y), on the back of revenue totalling RM130.4 million. The company declared dividends totalling 36 sen per share for the first half (1H) of the year, including special dividends of 20 sen per share. Its shares will trade ex-entitlement on July 31.

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Strong interest post-election boost to earnings
Bursa enjoyed a strong pickup in securities trading volume in May and June, as investors put their money back to work, having sat out on the sidelines for months in the run-up to the general election. Retail participation saw the largest comparative increase — accounting for 20% of average daily traded value in 1H13, from 16% in 1Q13.

Daily trading volume increased to 1.71 billion shares valued at RM2.39 billion, on average, in 2Q13 — up sharply from the daily average of 1.07 billion shares valued at RM1.72 billion in 1Q13. As a result, revenue from securities trading rose to RM65.8 million, compared with RM43.2 million in the immediate preceding quarter.

Equity trading volume pares back on renewed caution
Having said that, trading volume has pared back some in recent days. While investors are still relatively upbeat on the country’s prospects going forward, increased volatility in the global financial market has dampened sentiment somewhat.

Trading volume on the local bourse lost momentum towards the later part of June. Daily trading volume in the first three weeks of July dipped to about 1.45 billion shares, on average, down from the daily average of 2.32 billion in May and 1.9 billion in June.

Renewed caution in the market, this time, is triggered primarily by talks of the US Federal Reserve tapering off its bond purchases and possibly ending the programme by mid-2014. This caused yields on the longer dated US government notes to spike sharply higher, resulting in the strengthening of the greenback and a reversal of hot money flows from emerging markets.

At the same time, GDP growth in export-oriented emerging countries is being pared back due primarily to slower than expected expansion in China, which had been the main driver for global growth since the financial crisis. Growth in the world’s second largest economy decelerated to 7.5% in 2Q13, from 7.7% in 1Q13 and 7.9% in 4Q12.

With the US economic recovery expected to gain traction, the narrowing gap in growth is likely to further attract funds back to the US. Case in point, both the Dow Jones Industrial Average and Standard & Poor’s 500 indices closed at fresh all-time record highs last week and are up by almost 19% in the year-to-date.

By comparison, performances in regional markets were mixed with the bellwether indices in Hong Kong, China and South Korea in the red while Singapore is up by a marginal 1.5% over the same period. The FBM KLCI is up 6.4% in the year-to-date. Only the Japanese market outperformed after the country adopted an aggressive monetary policy.

The local bourse recorded positive foreign fund inflows for six consecutive months since December 2012 but saw a sharp reversal in the month of June. Foreign ownership dipped to 24.7%, from the high 25.2% in May.

Given the possibility of continued funds outflow, local investors are understandably more cautious. To be sure, there is still strong interest in select sectors and stocks, particularly in mid-sized and smaller cap stocks. But overall trading volume could stay below the levels recorded in 2Q13, pending clearer directions.

Thus, we expect Bursa’s earnings from equity trading in 3Q13, at least, to fall back from the strong results in 2Q13. Trading volume could regain momentum towards the end of the year, depending on how events play out on the global stage in the coming months.

Increased volatility will benefit derivatives market
On a positive note, the increase in volatility should translate into stronger interest in derivatives products — the benchmark index futures, FKLI and crude palm oil futures, FCPO.

For instance, palm oil prices have seen some large gyrations in recent weeks. The benchmark futures contracts traded as high as RM2,491 per tonne in June and as low as RM2,222 per tonne last week. CPO futures accounted for roughly 73% of total contracts traded on the Bursa Derivatives in 1H13.

Overall trading volume remains on an uptrend — since the migration to the Globex electronic trading platform — bolstered by rising interest from foreign participants. Some 43,358 contracts were traded daily, on average, in 1H13, up from 35,845 in 1H12.

Revenue from derivatives trading totalled RM35.9 million in 1H13, up 21% y-o-y. Bursa plans to introduce more products to boost volume and expects to hit daily traded volume of 50,000 contracts within the next 12 months.

Bursa shares still good proxy for economy
On balance, the company’s net profit will likely decline slightly in 2H13 — from the total of RM93 million in 1H — on the back of lower equity trading volume and revenue. Nevertheless, we estimate Bursa’s full-year net profit to increase to RM181 million, some 11% more than our previous forecast, thanks to the strong 2Q13 performance.

The stock has far outperformed the KLCI in the year-to-date. Its shares are currently trading at roughly 24.3 and 23.4 times our estimated earnings for 2013 and 2014 respectively. This is still in line with prevailing valuations for peer, Singapore Exchange Ltd.

However, further upside from here on may be limited for the time being. Over the longer term, Bursa remains a good proxy for the country’s economic growth. Plus, steady yields will keep a floor to its share price.

We estimate a slightly lower normal profit payout ratio in 2013, taking into account the special dividends. Dividends are estimated to total 51 sen per share for the current year (including 20 sen special dividends) and about 33.6 sen in 2014. That will give shareholders net yields of 6.2 and 4.1% for the two years respectively.

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.

This article first appeared in The Edge Financial Daily, on July 22, 2013.