Friday, February 23, 2007

Bursa The Confounding Stock

A regular reader wrote to me: "I was wondering whether you could share with your readers your thoughts on Bursa (the stock). I remember reading your blog some time back last year that it was one of your top 10 picks for 2006. The reason I am asking is that I am confused with the recent calls by analysts, a rare few say it's still a buy while most saying it is a sell due to high valuations vs. the region. How will you rate Bursa now? Still a buy vs the region, e.g SGX? .... Is our bourse really worth buying at 40x PER compared to SGX, Hang Seng or even ASX? What is the upside now? Recently, the news flow has been positive in the media with regards to our local bourse.. news such as higher volume is good for Bursa and that our market is slowly opening up with new products and ideas. e.g RSS. However, our bourse is and still is plagued by not-so-friendly policies which have seen some investors diversifying their assets overseas e.g in the case of PPB Oil and Genting. Meanwhile, new investors are looking more to list their companies abroad as they can fetch a better valuation and also avoid the bumiputera investor issue."

I think I set a target of RM9-10 when I put Bursa as one of the top picks, the stock was trading at RM6 I think. I think there were 5 sell reports out at that time, and only two research houses had it as a buy with a target of RM8.50, I think it was Deutsche and Nomura, kudos. It is very very hard to value Bursa or any exchange for that matter. Still, if you force analysts to come out with rpeorts, they will be racking their heads to pick the type of valuation that can justify the stock as a buy but will not be able to find it, hence the myriad of sells. Ask any analysts about Bursa share price and they will shake their heads.

The safest way is to do peer to peer comparisons, even then it has serious flaws. If you were to compare HKSE and SGX with Bursa, its apples and durians. Both are trading at 38x and 33x 2007 earnings respectively. While Bursa is at 40x. The other more established bourses such as LSE, ASE, Euronext and Deutsche Boerse trade in the 20s. Well, the action is a lot hotter in Asia in 2006 and probably 2007, hence the higher valuations for Asian exchanges. Bursa is higher than SGX and HKSE despite the fact that volumes and the derivatives are a lot bigger in Singapore and HK. It is also part of the "inefficiency" of Bursa that makes it to deserve a higher PE - it means there are more efficiencies and improvements to margins for Bursa in the future. Hence 40x or even higher is justifiable ... somewhat.

But a lot depends on the liquidity driven rally in Asia, if the bull run is a shortlived one, Bursa could fall quite fast. Bursa is and will always be a high beta to the index performance. High beta means higher than normal correlation to the index, i.e. when index gains 10%, Bursa could gain 25%, and the reverse will be true as well. So in that sense, Bursa is a VERY HIGH RISK stock, not one that you can lock up for your kids' education.

A much better yardstick would be the market cap for each exchange because to me an exchange IS a monopoly. Its a gatekeeper, a toll gate that collects from one and all when you want to buy shares in that country. How do you price a monopoly? How do you price OPEC if it was a company? Or better still, its like putting a price on UEFA if its corporatised and list as a money making venture.

HKSE's market cap is around US12bn, SGX is at US5bn and Bursa is at US1.7bn. Of course these two are financial centers and HK has a lot of advantages which also trumps Singapore such as the huge China listings and a huge derivatives market. SGX has made a lot of inroads with respect to derivatives but its China listings are more the smaller companies. One China listing in HK could equal 10-20 China listings in Singapore. If we look at SGX's valuation, it will never get close to HKSE because of the China factor. Hence the SGX is a better yardstick for Bursa's valuation. The call warrants is making good inroads and soon we will get at least 2-3 new CWs a week, then we stand a better chance to close the gap. Btw, Bursa, why no put warrants??? Pretty silly if you ask me.

As for RSS, my opinion is quite clear.... yuks! Bursa also lags terribly in futures. For example, tell me how accessible is accessing futures prices for the average investor?? How to keep track of index futures or palm oil futures when people have to pay/subscribe and even then find it hard to track the movements, its not visible enough. Why?? Because Bursa wants to make money at every juncture, want futures prices, pay first la. If not you can log onto Bursa website, which will crash everytime volume surge past RM2bn a day, and its delayed (you didn't pay wat..). The blinkered strategy is naive and short sighted. Only when people can monitor, will people trade, don't charge at every level.

To long term funds, there is only one Bursa. Though a few major stocks have decided to list in SGX instead of Bursa, Bursa is still the place where you can find stocks unique to Malaysia and its up to Bursa to keep it that way. As a long term investor you either have a stake or you don't. For exchanges such as LSE or Nasdaq, buying 5% or 10% of Bursa cannot hurt. For that, the Bursa will find a new support level for the stock even in the event of a collapse in bull run. I don't think you will find a lack of long term fund buyers of Bursa below RM9.00 owing to the respective market caps of various exchanges.

Hence even though I am pretty fed up with Bursa's management, I do think we are only in second stage of a major bull run. I have hence set a year's high price for Bursa at US2bn, which is a decent relative valuation to SGX bearing in mind the oncoming deluge of CWs amidst a bull market, which makes the target at RM13.50.

1 comment:

Hedge Fund said...

Thank you for your view and insights. Yes, Bursa is confounding... just like the little Bursa boy in the picture.. :)