Stock Watch: Bursa Malaysia Bhd — Why did revenue for derivatives market fall?

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KUALA LUMPUR, Aug 28 — Bursa Malaysia’s management says it thinks the underlying strong fundamentals of the domestic economy will lead to more foreign funds inflow and continuing support from local institutions for the equity market.

It thinks the dry El Nino weather, which will affect palm oil production, will continue to affect trading of its two key contracts on the derivatives market — the FKLI and FCPO contracts.

Bursa expects FCPO contracts to pick up in volume in the remaining months of the year.

The national stock exchange also expects to see an increasing need for Shariah compliant products due to the demand from Islamic funds, as well as those funds dedicated to ethical investments.

Wider usage of Murabahah contracts is expected to spur greater utilisation of its commodity trading platform, Bursa Suq Al-Sila’ (BSAS).

The company just announced earnings for Q2FY14:

Revenue: -5 per cent to RM 115.5 million

Profit: -14 per cent to RM 46.9 million

Cash flow from operations: RM 102.7 million vs RM 112.2 million

Dividend: Special dividend of 20 sen per share, interim dividend of 16 sen per share vs special dividend of 20 sen per share, interim dividend of 16 sen per share

In its financial statement, Bursa discusses the performance of its two main segments: the securities market and the derivatives market.

The stock exchange operator said the operating revenue for its securities market decreased mainly because of a decline in trading revenue.

The segment’s profit was also lower due because there was exceptional volatility a year ago, as a result of the 2013 general election.

Operating revenue from the derivatives market also fell, mainly from lower guarantee and collateral management fees earned, which are components of trading revenue.

The derivatives market recorded a lower profit year-on-year despite higher trading volume in the quarter. Bursa said the lower profit was a result of lower margin requirement.

Investor Central. We keep your investments honest.

1. What is the real reason for the fall in derivatives market revenue?

Although Bursa’s revenue decreased year-on-year, the drop was not a surprise as it was difficult to top the buoyant investor sentiment the same time last year after the general election.

But trading revenue for Bursa’s derivatives market fell year-on-year by 7 per cent to RM 16.1 million in Q2FY14.

Bursa just stated that the drop in derivatives trading revenue was due to lower receipts from guarantee and collateral management fees.

But what is the real reason for the fall in derivatives market revenue?

2. Why were there no more IPOs by overseas companies?

There were no listings by overseas companies on Bursa this quarter.

In contrast, Singapore’s SGX has in the last three months welcomed Indonesian Japfa that processes meat and operates dairy farms, Terratech which operates at the Kelantan Marble Quarry in Malaysia, Accordia Golf Trust which handles golf course assets in Japan, and Spackman Entertainment which produces Korean films.

3. Will it introduce more diversity in the industries represented on the exchange?

The diversity of the listings in Singapore is not just evident in the countries and regions where listed companies derive their revenues, but also in the sectors and industries they represent.

This is different from the listings on Bursa in the past few months, as can be seen in 7-Eleven (food and beverage), Boustead Plantations (palm oil), Icon Offshore (provider of offshore support vessels to the oil and gas exploration industry) and Econpile (piling).

In fact, Karex, a condom manufacturer that listed last November, broke the monotony of listings from the usual industries.

Does Bursa woo find companies that will provide more diversity in the industries represented on the stock exchange?

4. What are the goals of the marketing initiatives?

Bursa’s management said during an analyst briefing that it has started various initiatives to help improve retail participation, which stood at 25 per cent in H1FY14.

RHB reported in July that these initiatives include promotion and marketing efforts, as well as the recent launch of Bursa Marketplace.

Bursa Marketplace, launched at the end of April, is an online platform that provides investors with market information and trading ideas with the aim of growing retail participation.

It also seeks to woo younger investors between the ages of 25 and 35 to begin trading on the stock exchange.

According to RHB in the same report, there are currently more than 1,000 registered participants on the platform. How many users does it project to have by next quarter? What are the quantitative objectives of its marketing efforts?

5. Does it have a social media team?

Getting 1,000 registered participants in a few months is not a bad figure.

But we tried searching for Bursa Malaysia on Facebook and were surprised to find out that it does not have a social media presence — there is no official page on Facebook, while there is an unofficial-looking account on Twitter called @bursamalaysia and its Bursa Marketplace Twitter account (unverified on Twitter) has only 335 followers.

These signs seem to point to the fact that Bursa does not have a social media team, or its current one is not doing its job very well.

If it wants to connect to younger investors, it needs to do it on social media.

AirAsia, known for engaging its customers on social media, now devotes three pages of its annual report to its social media efforts.

Will Bursa Malaysia get a social media presence this year?

6. How much does it intend to spend on marketing this year?

The amount Bursa spent on marketing has been declining while revenue has been increasing in these few years.

How much does it intend to spend on marketing this year?

7. What will Bursa do with its excess cash?

Bursa declared a special dividend of 20 sen per share and an interim dividend of 16 sen per share for this quarter.

This will make many investors happy, but RHB wrote in a report in July that it is concerned that after the payment of the special and interim dividends, its cash pile of RM 375 million as of June is estimated to fall to RM 183 million.

The broker said Bursa requires about RM 200 million in cash for operations and capex.

It thinks Bursa will now need some time to rebuild its cash pile.

On the other hand, Alliance DBS Research wrote in a report that it estimates Bursa is likely to sit on RM 200 million of cash after paying out its declared dividends.

And while the analysts understand that the excess cash is reserved for business expansion and higher allocation for clearing guarantee funds, they think there is a possibility Bursa might return the excess cash to shareholders as Bursa practices efficient capital management.

What will Bursa decide to do with its excess cash — retain it, or pay it to shareholders?

8. Does management think it can beat FY13’s total IPO funds raised?

According to Bursa’s Q2FY14 report, the total funds raised by listings by H1FY14 so far had surged 74 per cent to RM 18.2 billion compared to RM 10.4 billion in H1FY14.

Does management think it can beat FY13’s total IPO funds raised?

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do. — Investor Central

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