SI Research: Bursa Malaysia – Holding Up In Challenging Times
Bursa Malaysia (Bursa), is the stock exchange operator of Malaysia and just like any stock exchanges around the world such as the New York Stock Exchange, Tokyo Stock Exchange and Singapore Stock Exchange, Bursa is in an industry where it possesses a strong economic moat in the form of strict regulations, and it being the only stock exchange in the country.
Economic moat, a term coined and popularized by billionaire investor Warren Buffett, refers to a business’s competitive advantage that it has over its competitors and new entrants and can be derived in the form of branding, regulation, technological capabilities and economies of scale.
Having established the fact that Bursa practically holds a monopoly position in Malaysia, where strong regulations has made it very tough for new entrants to challenge its position in the market, we look at its recent performance to see if it has lived up to expectations.
Past Growth Tapers To Flattish Results
From FY09 to FY13, Bursa has enjoyed relatively strong gains in its operating revenue with a Compound Annual Growth Rate (CAGR) of 10.24 percent. At FY09, its operating revenue stood at RM297.8 million and by FY13 it has risen substantially to RM439.8 million.
The same trend for operating revenue was also reflected on Bursa’s net earnings. FY10 recorded a net profit of RM113 million and has risen significantly to RM198.2 million in FY14.
However, the upward trend seems to be a thing of the past when Bursa released its FY15 results earlier this month.
For FY15, Bursa’s operating revenue increased just 3.4 percent to reach RM487.7 million and net profits had a meagre increment of just 0.19 percent to RM198.6 million.
Investors may be wondering what could have happened to bring such a powerhouse with relatively strong performances and strong economic moats to report such flattish results. We found some possible explanations in a part of its financial statements, where it commented about seasonal or cyclical factors:
“The Group’s performance is not affected by any seasonal or cyclical factors but is affected by the activities in the Securities and Derivatives Markets”
Just like all stock exchanges, Bursa has a non-cyclical business model which makes money when companies get listed and when traders perform transactions, regardless of buy or sell. Therefore the flattish results in recent years were actually due to the slowdown in growth of capital market activities.
Lacklustre Results All Expected
The lacklustre growth in revenue and net earnings of Bursa due to the softening of trading activities were actually within the expectations of many brokerage houses in view of many factors in the Malaysian economy.
In recent years, the Malaysian economy has been dealt several blows from plunging commodities prices, weaker Malaysian ringgit, and market sentiments have been depressed by broad macro uncertainties such as the slowdown of China and further potential outflow in foreign funds.
IPO Pipeline Running Dry
Other than the softening of trading activities, the weak sentiments of the Malaysian economy has also impacted another source of Bursa’s income, which is from the listing of companies, which allows Bursa to collect listing fees and also benefit from the trading of share of the new listed counters.
In 2015, Bursa had 11 initial public offerings (IPO) as compared to 15 in 2014, and this is of no surprise with investors’ sentiment at a low. Bursa also saw 5 notable IPOs which were planned but ultimately did not materialise – Sime Darby Motors, Edra Global Energy, Weststar Aviation Services, Qualitas Healthcare Corporation and Asian Healthcare Group.
In the beginning of 2016, the delay in the RM637.5 million IPO of energy and water group Ranhill Holdings did no favours in curbing the jitters for investors in what was once the most popular destination in the region.
All in all, Bursa has been hit in recent years mainly due to the slowdown in the growth in trading activities as well as the decrement and delays in IPOs. Moving forward, investors should remain cautious and continue keeping track of the political and economic stability in Malaysia, which will directly translate to investors’ sentiments to the market and affect their trading volume. However on a positive note, the management of Bursa has stated that they expect more active trading of the derivatives market, spurred by volatility in commodity prices.
As of 23 February 2016, Bursa is trading at a P/E of 22.97x and is already trading near its average target price of RM8.66. We believe that any upside will only come in tandem with market optimism affected by the global economy outlook as well as local stability.
This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
