Bursa ... Apr10

S & P Results Review & Earnings Outlook

 Bursa’s 1Q10 profit was on the low end of our estimates. While revenue is largely within expectations, higher costs are lowering assumed profitability. We are adjusting our 2010 and 2011 profit forecasts lower by 23.6% and 19.1%, respectively. Our 2010 reduction mainly reflects, however, a pushing back in our assumed roll-out of the direct market access trading platform to more broking firms to 4Q10.

 While we lower our numbers, we note that 1Q10 performance does mark a sharp improvement over 1Q09 levels, with the stock market having recovered from the low point of the 2008/2009 bear market. Trading velocity at 30%-35% is expected to be sustained in 2010, while the increase in share price values should help provide revenue support.

 Derivatives revenue so far is limited with no apparent boost from the tie-up with the CME Group as yet. We note there may be risk to our assumed derivatives income, should trading volumes remains lackluster.

 Cost pressures have probably been largely reflected in the 1Q10 numbers, with higher staff costs due to increased bonus budgets. We expect the higher costs can be offset should trading volumes improve. However, with broking firms slower to implement the Direct Market Access system, the boost from the new trading platform to market volumes is not anticipated to be significant until 2011.

Recommendation & Investment Risks
 We retain our Buy call on Bursa but lower our 12-month target price to MYR8.50 (from MYR9.00). Bursa’s share price has consolidated along with the market, but we expect a strong lift in 2H10 market performances as the global economic recovery gains strength.

 As such, trading volumes should rise from 1Q10 levels. We note, however, that 2Q10 may be relatively quieter on a YoY basis given the exceptionally strong activity in 2Q09 and this may weigh on Bursa’s share price performance in the next few months.

 We continue to value Bursa on 32x 12 months forward PER, in line with its historical trading range. Recurring 3-year EPS growth of 27.2% should support the current PER range.

 With our lowered earnings, we have also reduced our assumed 2010 DPS to MYR0.23 from MYR0.34. We continue to assume a dividend payout ratio of 92%.

 Risks to our recommendation and target price include a prolonged consolidation in the stock market on the lack of fresh drivers and limited investor interest. Also systemic risk, as the global financial system continues to recover from the recession and regulatory overhauls may result in deteriorating confidence, leading to lower revenue for Bursa.