2006 Top Buys #7
Unexpected By Many
I cannot tell you how many times I have wanted to make this stock as a Top Buy for 2006 but the share price just runs and runs. I have never read ONE report calling this stock a buy, but I have read many credible research reports calling this stock a Strong Sell or Avoid. Currently, Standard & Poor's has the stock as a rare "Strong Sell". I don't think I can wait anymore. I was thinking that the overall global equity pullback for the last two days may see a more decent entry price... but NO. Funny thing is, I have attacked this company many times in my blogs. Want a scathing report, read my blog on 10 March 2006 on this company. For an even more scathing critique, take a peek at the 16 February 2006 blog.... lol. Then you will understand better my liking for the stock.
The reason why I can criticise this stock for the longest time is that there are so many areas they can easily improve. There are signs that the new machinery in management is moving things. Why would 99% of research analysts rate this a sell. It is so hard to justify calling it even a HOLD. Before you kill me for creating the suspense, the stock is Bursa Malaysia. Factors usually cited by the analysts to sell Bursa:
a) Too expensive in terms of PER, FY06 PE is about 38x when regional exchanges trades at an average of just 30x. No one can look beyond that PER figure, whether you convert that to Enterprise Value over EBITDA, its the same end result.
b) The continued surge in share price can only reinforce an analyst's call. If you had the stock at a Hold when it was RM5.80, when it surged past RM7.00, you have to call it a SELL.
The above is a couple of major drawbacks I have with company analysis, they are held back by boundaries of valuation. If you cannot justify by realisable numbers projections, its useless and non-defensible. Comparative analysis is only good for comparison, there is no automatic suggestion that everything will gravitate to the mean. Bursa Malaysia is the kind of stock that you can only invest by imagination and leveraging on its potential rather than its present form.
Share Price: RM6.85
Paid Up: RM515.1 million
P/Book Value 06: 3.8x
Expected net EPS 06: 18 sen
Forward PER: 38x
Target Price - 12 month - (6x P/B): RM10.40
Potential Return: 52%
Why I like the stock:
1) A monopoly that is under-rated. The surge in valuation of almost every exchange in the world over the last 9 months is due to an appreciation of the market monopoly and the growth in global trading. Exchanges trying to gobble one another is a sign of "too much of a good thing" going after "another good thing". Bursa is an "under managed" company, i.e. have yet to flex its potential and leverage on its platform. Remember , its a monopoly.... its even better than cigarettes, you like BAT, then Bursa stands head and shoulders above that.
2) So bad, it is good. Lack of exciting products. Slow in introducing REITs, ETFs, Singa Stock Futures and Covered Warrants compared to the rest - only spells potential.
3) Listing fees up. Trading and transactional fees will go higher as Malaysia is just re-emerging from the terrible financial implosion from 1997-2004. the massive wealth destruction has gradually been built back to a decent liquidity level.
4) The Singapore equation. Though it will be delayed, the prospects will be enormous for both sides. It will improve transactional fees both ways. A share swap is likely to consolidate the deal. Allowing Malaysians to buy Singapore stocks and vice versa is a natural and necessary development. Other exchanges are rapidly bulking up on covered warrants and ETFs - the fact that the stocks on Malaysia and Singapore are quite distinct and different will be a major point for pushing the deal forward. Both sides have their speckies, Malaysia's Mesdaqs and Singapore's small China plays.
5) Comparing regional exchanges valuation using PER is short-sighted. SGX 06 PER is 27x, ASX is 20x and HKE is at 44x (Bursa is at 38x). I would like to look at P/Book Value: SGX is at 8.5x, ASX at 11.8x and HKE at 13.6x (Bursa's is only 3.8x). Now why is that.... there are a couple of factors which have escaped most analysts: Malaysia has one of the highest percentage of its GDP that is listed in the world; and the level of retail participation is in the top quartile of global exchanges. Both of these factors would ensure for a more vibrant trading environment. The market velocity has been very low for the last few years due to the country just re-emerging from a period of constricted liquidity.
6) The company will not have to spend a lot of money in R&D, profits mostly goes straight to the bank and back to shareholders. For a monopoly that does not have to defend its turf, we can expect more special dividends and bonuses.
7) Last year was a poor year for Malaysian stocks, trading was stunted and we finished end 2005 basically at the same level when we started in beginning 2005. This year was much better and I expect the next couple of years will be quite decent too. Even in a so-so year like 2005, Bursa can still chalk up impressive profits, what more in a good year.
Recent rumours that Nasdaq might buy a stake in Bursa is sheer stupidity. I would not rule out a share swap with SGX as it makes a lot of sense, it automatically propels both exchanges as ONE up in size, credibility and volume. Staying independent just does not crack it when NYSE is buying Euronext and Nasdaq is gobbling LSE.... the world is getting global and smaller at the same time. One that would not just rival HK but may eventually out strip HK even. I do not see Bursa's share price easing, that's why I am giving up on waiting. Profits will continue to pour in, and Yusli will continue to improve EPS, and he is likely to sell the Bursa building and do a leaseback which will add RM300 million into its coffers. The establishment of a RM100 million clearing guarantee fund will release RM115 million back to Bursa also. Gotta go, Yusli should be calling soon....
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