"Sell" call on Bursa

BusinessTimes: FOREIGN research houses, Merrill Lynch, Citigroup and CLSA Asia Pacific, are recommending a "sell" on shares of stock exchange operator Bursa Malaysia Bhd.Merill, in a report dated March 11, derived a fair value of RM5 on Bursa, which is drastically short of its closing price of RM8.30 yesterday and the lowest target so far of at least 16 research houses that track the stock. Citigroup and CLSA Asia Pacific cut their target price on Bursa this week to RM7.08 and RM8 respectively. Merrill, which derived the fair value based on a dividend discount model, said it expects falling trading velocity and lower clearing fees to affect Bursa's earnings this year.

The new clearing fees, which took effect from January 1 this year, was announced in Malaysia's national budget late last year.The fee was cut from four basis points to three basis points of trade value, while the cap has been doubled to RM1,000 per trade. According to Merrill, Bursa's management is hopeful that the change will not hurt revenue with the increase in the capable to offset the lower headline clearing fee. The research house nevertheless estimates that Bursa could see a minimum four per cent loss of revenue from this. It also voiced surprise at "the almost complete lack of attention" paid by the analyst community to the impact of the clearing fee cuts. It expects Bursa to make a net profit of RM215 million this year, which is about 17 per cent lower than a consensus forecast of RM260 million. Bursa made RM241 million in 2007. Citigroup, in its report on March 17, lowered its earnings forecast for Bursa for 2008 to 2010 by 29 per cent to 35 per cent, citing lower trading volumes, lower effective clearing fees and slower growth in the derivatives business. It expects volumes to stay sluggish over the next two quarters before improving in the final quarter of 2008. CLSA, meanwhile, maintained its "underperform" call on Bursa.

MyTake: ML's Target Price is RM5.00, Citigroup's is RM7.08 and CLSA's is RM8.00 Imagine only last year, Bursa's price has gone up to about RM16.90. Valuing Bursa's fair value is extremely difficult as a stock brokers' income is very extreme at both ends. The conditions of the market plays a very important role on whether a broker makes or breaks for the period. Technically, Bursa is currently in an oversold position. Bursa's support price is about RM8.00 which was also reached during the subprime sell down in August 2007. Strong floor for this stock is at RM5.50 - RM6.00