Review

• Bursa reported a 20.5% YoY increase in 3Q23 net profit. 9M23 net profit grew from RM177.6mn to RM192.8mn, representing 75% of our full year estimates. Annualised ROE was higher at 33%, vs 31% a year ago.

• Results improved sequentially on the back of stronger operating revenue (+9.6% QoQ) due to higher securities trading revenue. However, the net profit fell by 20.9% QoQ to RM60.4mn due to higher operating expenses from a one-off reversal of provision in 2Q.

• Meanwhile, the 9M23 operating revenue fell by 0.8% YoY to RM289.6mn, led by a 4% YoY decline in the overall trading revenue. Securities Trading Revenue contracted by 3.3% YoY to RM196.4mn vs RM203.0mn a year ago due to lower Average Daily Value (ADV) On Market Trades (OMT). Meanwhile, Derivatives Trading Revenue fell by 8.0% YoY, attributed to lower Average Daily Contracts (ADC) and lower collateral management fees. Bursa Suq Al-Sila’ (BSAS) trading revenue, however, grew by 8.8% YoY to RM12.9mn from RM11.8mn.

• The non-trading revenue segment expanded by 5.0% YoY, underpinned by Depository Services, Data Business, Member Services & Connectivity and Conference fees & Exhibition related income, with each improving by 1.3%, 11.5%, 3.5% and >100% YoY, while Listing & Issuer Services declined by 8.3%.

• Total operating expenses declined to RM209.6mn vs RM214.7mn in 9M22 as increases in 1) staff costs (+5.5% YoY) due to higher headcount for new business and capacity building, and 2) Depreciation and Amortisation (+26.3% YoY), Marketing and Development (+10.1% YoY) along with IT Maintenance (+26.9% YoY) due to efforts to enhance the cybersecurity, were offset by Service Fees, which declined by 3.4% YoY and a one-off reversal of provision for SST on digital services. Bursa reported a 9M23 cost-to-income ratio of 46%, little changed from 47% a year ago.

• By segment, Securities Trading Revenue comprised 44% of total operating revenue. Total ADV slipped to RM2,020mn vs RM2,112mn in 9M22. By segment, retail ADV was relatively stable at RM562mn (9M22: RM561mn), while the ADV by domestic institutions dropped to RM893mn from RM986mn. Meanwhile, foreign institutions' ADV was unchanged YoY at RM565mn.

• Trading velocity climbed sequentially to 30% from 26% in 2Q23. YTD, the 9M23 trading velocity eased slightly to 29% from 30% in 2022. Elsewhere, the market capitalisation broadened slightly to RM1,761bn from RM1,602bn in September 2022. Capital market activities improved as total funds raised advanced slightly to RM8.1bn (9M22: RM7.2bn), as funds raised from the secondary market and new listings rose by 13.6% and 10.7% YoY.

• Bursa reported total net foreign outflows of RM2.0bn in 9M23. To recap, Bursa reported total net foreign inflows of RM4.4bn in 2022. The foreign shareholding level (by market cap) slipped marginally to 19.5% in September 2023 from 20.6% in December 2022. By trading mix, trading participation by foreign institutions broadened to 28% (2022: 27%). Comparing trading participation by retailers and institutions, retail investors were marginally higher at 28% (2022: 27%).

• Trading in the Derivatives Market was primarily supported by Crude Palm Oil futures trading. Nevertheless, the ADC of crude palm oil futures (FCPO) sank to 62,221 in 9M23 compared with 66,871 in 9M22. Meanwhile, the FBMKLCI futures (FKLI) trading widened YoY to an ADC of 11,848 from 11,479. The trading velocity for FCPO declined to 30% (from 46% in 9M22), while the trading velocity for FKLI stood at 7% (9M22: 11%). Combined, the YoY total ADC traded softened to 74,268 contracts compared to 78,540 a year ago. Of this, 84% of total trades were in FCPO and 16% in FKLI. Encouragingly, we continue to note an increase in foreign participation, as foreign institutions now account for 59% of total ADC traded by investors, followed by Retail (25%). T+1 After-Hours Trading continued to gain momentum, rising by 8.2% YoY in ADC, contributing 10.8% of total ADC (9M22: 9.4%).

• On the Islamic market trading activity front, the BSAS trading revenue accounted for around 3.0% of total operating revenue. In 9M23, the segment’s ADV rose by some 4.9% YoY to RM45.4bn as the number of trading participants increased to 343 from 319 in 9M22, while the number of Shariah Compliant Stock (in terms of market capitalisation) stood at around 82% (9M22: 78%). Bursa noted that BSAS saw strong trading activities during the year, with local participants contributing 83% of the trades. The market capitalisation of Shariah-compliant stocks improved by some 12.0% YoY to RM1,157mn.

Impact

• No change to our earnings estimates.

Outlook

• We believe that sentiments improved in 3Q attributed to a more favourable political environment, as voters opted for political stability in the recent state elections. Monthly foreign flow improved in July, August and September 2023, resulting in a total inflow of RM2.2bn during the quarter. Despite the encouraging sequential improvement in trading revenues, overall yearly market activities remained weak due to persistent macro headwinds. Trading activities in the derivatives market were also lower, although, on a positive note, the momentum of T+1 After-Hours Trading increased, spurred by an increase in trading by foreign institutions.

• For now, Bursa maintains its guidance for a stable FY23 performance, with PBT estimated between RM295mn and RM326mn, partly supported by a non-trading revenue growth rate of 5-7% YoY. Capital market activities should improve on the back of ongoing initiatives to attract trading and IPOs/products to strengthen market vibrancy, such as the launch of Bursa Gold Dinar and the Commercialisation of a new debt fundraising platform for SMEs to support earning growth. With 25 new IPO listings YTD, Bursa appears to be slightly below its target of 39 IPO listings in 2023 with a total IPO Market Cap of RM10bn.

Valuation

• We maintain Bursa’s target price at RM7.30, based on an implied FY23 PER of around 22.6x. We reiterate our BUY recommendation on Bursa.

• Key downside risks include: 1) softer corporate earnings due to rising inflationary pressures and OPR, 2) inability to sustain foreign inflows due to the intense competition from attractive regional markets, and 3) fragile consumer and business confidence.

Source: TA Research - 1 Nov 2023