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Bursa Malaysia Berhad (OTCPK:BSMAF) [BURSA:MK] stock is awarded a Hold investment rating. Bursa Malaysia’s key positives are the Malaysian stock market’s growing number of IPOs and robust trading activity, which have favorable read-throughs for the company’s top-line outlook. But the key negatives for BSMAF relating to its demanding valuations and rising expenses can’t be ignored. A mix of positives and negatives for Bursa Malaysia is supportive of a Hold rating.
My prior August 6, 2020 write-up reviewed Bursa Malaysia’s 2020 interim results and analyzed the company’s prospects for the latter half of that year. This latest update focuses on the key positives and negatives for BSMAF.
Bursa Malaysia’s shares are traded on the Over-The-Counter market and the Malaysian equity market. The company’s OTC shares have modest trading liquidity, but its shares listed on Malaysia’s stock exchange are pretty liquid. The three-month mean daily trading value for Bursa Malaysia’s Malaysia-listed shares was $5 million, as per S&P Capital IQ data. Readers can trade in Bursa Malaysia’s shares listed on the Malaysian stock exchange with international brokerage firms such as OCBC Securities in Singapore and Boom Securities in Hong Kong.
All Eyes On Strong Trading Activity And Increase In IPOs
Bursa Malaysia’s revenue growth accelerated significantly in recent quarters, and BSMAF is likely to register solid top-line expansion for the full-year considering trading activity metrics and the target for IPOs.
The company’s top-line growth improved substantially from +8% YoY for Q4 2023 to +20% YoY and +38% in Q1 2024 and Q2 2024, respectively. According to consensus data obtained from S&P Capital IQ, the market anticipates that Bursa Malaysia can turn around from a -2% revenue contraction in F2023 to deliver a +28% increase in top line for the current fiscal year.
Securities market ADV (Average Daily Value) for Bursa Malaysia jumped by +66.8% YoY to RM 3,270 million in the first half of 2024 as indicated in BSMAF’s earnings presentation slides. As such, it is no surprise that the company’s securities trading revenue also grew strongly by +52% YoY to RM 192 million during the same time period. At its 1H 2024 earnings call, BSMAF indicated that “our performance for the first half of 2024, reflects a substantial increase in the trading interest in our (Malaysian) markets.”
There is a good chance that trading activity in the Malaysian equity market will remain strong going forward, taking into account the health of the country’s economy. Malaysia’s GDP growth improved from +4.1% in the first half of last year to +5.1% for the first half of the current year. The country is expected to achieve the “upper end of the government’s official forecast range of 4% to 5%” for the full year, according to the Ministry of Finance’s mid-August media release. It is natural to assume that Malaysia-listed stocks will garner meaningful interest from investors when the domestic economy is growing strongly.
Separately, the number of new public listings on the Malaysian equity market rose from 16 in H1 2023 to 21 in H1 2024. BSMAF’s goal is to have the number of IPOs for Malaysia’s stock exchange increase from 32 last year to 42 this year. These numbers were taken from Bursa Malaysia’s earnings presentation slides. Bursa Malaysia stressed at the company’s 2024 interim earnings briefing that it is “confident of meeting” the full-year IPO target, and revealed that the Malaysian equity market witnessed another seven IPOs in July. Having already achieved 28 IPOs in the first seven months of 2024 implying an annualized number of 48, BSMAF is in a good position to realize its 2024 goal of 42 new public listings.
Trading activity for the Malaysian equity market has been robust, and the company has set an ambitious goal for public listings in Malaysia this year. This explains why Bursa Malaysia’s revenue growth prospects are favorable.
But Higher Costs And Rich Valuations Are Concerns
In the preceding section, I drew attention to BSMAF’s positive revenue outlook, supported by strong trading activity and new IPOs. For the current section, the spotlight is on Bursa Malaysia’s expenses and valuations.
Bursa Malaysia’s operating costs increased by +36% YoY in 1H 2024, while the company’s top line expanded by +29% YoY for the first half of the year. It isn’t good to see a company’s operating expenses grow at a faster rate than its revenue.
The sell-side analysts are forecasting that BSMAF’s net profit margin will contract by -100 basis points in FY2024, based on S&P Capital IQ’s consensus data. At the company’s interim results briefing, Bursa Malaysia noted that “we aspire to advance as a multi-asset exchange” with a wider “suite of products and services.” It is likely that BSMAF will have to recruit more employees and invest in new technology solutions to broaden its offerings, which will likely come at the expense of short-term profitability.
Separately, Bursa Malaysia’s shares have become more expensive, as investors reward the stock for the solid trading activity on the Malaysian stock market and the increase in the number of public listings.
The trailing twelve months’ normalized P/E multiple for Bursa Malaysia re-rated from 23.2 times at the start of 2024 to 27.1 times now, which represents a +30% premium over its three-year historical mean P/E of 20.8 times.
Also, Bursa Malaysia’s demanding P/E multiple at the twenties level compares unfavorably with the company’s modest consensus FY 2023-2026 normalized EPS CAGR projection of +10%.
Bottom Line
I continue to have a Neutral view of BSMAF. I am positive on Bursa Malaysia’s top-line prospects considering IPO and trading activity metrics. But the stock’s valuations are rich, and the company’s near-term profitability is likely to be impacted by higher costs.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
