Bursa Malaysia Bhd (KLSE: 1818) was incorporated in the year 1930 and is listed in the Main Market of Bursa Malaysia Stock Exchange. The company’s principal activities are to facilitate and operate the listing of securities, derivatives and offshore exchanges as well as Islamic banking in Malaysia. It also provides depository, clearing and settlement services as well as market information relating to securities and derivatives quoted on the exchanges.
Since the recovery of sub-prime crisis in the year 2008/2009, the company’s share price has been increasing from lowest point of RM2.93 in Mar 2009 to RM7.82 per share at the time of writing. This is equivalent to a CAGR of 13.1% over the past 8 years.
So, what so special about this company? Here are the 4 key insights you should know about Bursa Malaysia Bhd before investing into it:
#1: Diversified Income Streams
For exchange companies like Bursa Malaysia Bhd (“Bursa”), its business model is mainly dealing with securities (i.e. equities, convertible equity, debt securities, warrants, etc.) and derivatives (i.e. futures and options on futures contract).
How does the company make money? In general, the company’s income stream can be categorised into recurring and non-recurring in nature (see diagram below):
The company has 4 main business segments; 1) exchange business; 2) derivative exchange; 3) clearing, settlement & depository; and 4) information services. Both the company’s income streams, recurring and non-recurring, are generated from these 4 main business segments.
Looking at the 4 main business segments and its income streams, companies that wants to go for listing in Bursa Stock Exchange would have to pay an initial listing fees and an annual listing fees. If companies or traders that wants to enter into futures contract or options on futures (i.e. derivatives) would need to apply as participants. For this application, Bursa charges membership fees annually. Subsequently, any derivative trades done by the participants will be charged a fee per contract basis.
There is also Investors like you and me who wish to invest in Malaysian stocks, a depository account (i.e. CDS account) with Bursa is required for a small RM10 fee and subsequently, any matched trades done will be charged a clearing fee. In addition, Bursa also provides market data subscription services to individuals or companies and these are charge either monthly, quarterly or annually basis.
#2: Monopoly Position
There is only one exchange holding company in Malaysia. This makes Bursa in a natural monopoly position. Any individuals or companies that wants to either trade or raise funds would have to go through this exchange company.
This explains the company’s ability to generate increasing net profit consistently over the past 10 years with a compounded annual growth rate (“CAGR”) of 8.8%. Its net profit margin has been consistently above 40% since year 2014.
#3: Growth is dependent on the overall Malaysia Economy
While Bursa has a definite economic moat, it does not have an interesting growth stories. This is because the company is in a highly regulated industry where any introduction of new products (i.e. short selling, stock lending & borrowing), services, trades & fee structures (such as changes to listing and clearing fees) are all subject to approval from Securities Commission (“SC”) and other regulatory bodies.
For example, intraday short selling was re-introduced and approved by the Securities Commission when the former Prime Minister Datuk Seri Najib Tun Razak announced in his keynote address at World Capital Markets Symposium 2018 on 6 February 2018. Had this not been announced, Bursa will not have any intraday short selling activities to boost its trading volume.
So, how else can Bursa grow its business? Because most of the company’s income (i.e. clearing fee and trading fee) is dependent on the overall trading volume, it makes sense to increase the trading volume. However, the trading volume only increase if the overall Malaysian economy condition is good. This will encourage more investors (i.e. foreign and local) to invest in KLSE.
Since the sub-prime crisis in year 2008/ 2009, the trading volume in KLSE has been increasing until year 2014 to 2016 as the Malaysia economy was hit by the crude oil supply glut. As you can see, the trading volume in KLSE was quite volatile. Any negative events such as outflow of foreign funds and the political uncertainties in Malaysia could affect the confidence of investors and thus, lower the trading volume.
To reduce such volatility effect, what Bursa did is to increase its stable revenue such as the annual listing fees that all listed companies are required to pay, and the provision of information related to listed securities in KLSE as well as derivatives.
#4: Consistent Dividend Payment
Generally, I would classify this company as a slow grower due to its nature of industry where it does not have much growth drivers. According to Peter Lynch, a slow grower should pay a higher dividend than fast grower because there is no point in reinvesting for business expansion when the industry has matured or saturated.
In Bursa’s case, the cash generated from the exchange business can only be distributed to its shareholders because any introduction of new product requires the SC’s approval beforehand. There is really nothing much can the Management of the company do with the cash.
Hence, this explains why the company’s dividend payout has always been above 90% since year 2010.
If you are looking for a good dividend stock apart from the extremely overvalued stocks like Nestle (Malaysia) Berhad (KLSE: 4707), Bursa would be a great company to start with. However, this is not to say that you should immediately invest into it. You should also look at its current valuation against its peers.
At the time of writing, the company trades at a PE of 27.6 times which gives a dividend yield of 4.2%. While its closest peers by market capital, Singapore Exchange Limited (“SGX”), trades at a PE of 21.8 times with a dividend yield of 4.1%. Bursa seems to be trading at a premium when compare against SGX.
“A good company can be a bad investment if bought at the wrong price, a bad company can be a good investment if bought at the right price”
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