Investment Highlights

• We maintain our HOLD recommendation on Bursa Malaysia (Bursa) with an unchanged fair value of RM6.80/share, pegging the stock to FY23F PE of 22x (5- year historical average).

• No changes to our earnings estimate and our 3-star ESG rating. We continue to maintain FY23F/24F/25F assumptions for the daily average trading value (DATV) of the securities market at RM2.3bil/RM2.6bil/RM2.8bil.

• Bursa reported weaker earnings of RM56mil (-17.4% YoY) in 1Q23, attributed to lower securities and derivatives trading revenue. This was close to our estimate of RM58mil in our earlier report on 3 May 2023.

• Bursa’s 1Q23 earnings were within expectations, accounting for 22.6% of our FY23F net profit and 23.7% of consensus estimate.

• In 1Q23, DATV (of on-market transactions) for equities declined to RM2.1bil vs. RM2.6bil in 1Q22. Mar 2023 saw weaker DATV of RM2bil (Feb 2023: RM2.4bil) due to concerns on the health of the banking sector in US and Europe which impacted investor sentiments.

• Velocity of the securities market was lower at 31% in 1Q23 compared to 36% in 1Q22.

• In 1Q23, trades by domestic institutions accounted for 47.6% of total value of securities traded in the securities market vs. 47.8% in 1Q22. In contrast, the mix of shares traded by retail investors rose marginally to 28.5% while that of foreign institutions slipped slightly to 24% in 1Q23. The Effective clearing fee rate for the securities market was higher at 2.66bps in 1Q23 vs. 2.57bps in 1Q22.

• 1Q23 saw foreign fund outflows from the securities market of RM1.9bil cumulatively vs. RM6.5bil inflows in 1Q22. Amidst the banking sector stress in major economies, an outflow of RM1.3bil of funds from the securities market was recorded in Mar 2023. These were higher than the foreign fund outflows of RM348mil in Jan 2023 and RM168mil in Feb 2023.

• 1Q23 saw a total of 10 IPO listings (Main: 2, ACE: 7 and Leap Market: 1) vs. the exchange’s KPI target is to achieve 39 IPOs in FY23 with a total market capitalisation of RM10bil.

• We continue to expect DATV for the securities market to be weak in the 1H23 contributed by i) uncertainties in central bank policy rate directions, concerns on elevated inflation and technical recessions in developed markets, and ii) banking sector stress in advanced economies. Investment sentiment is expected to remain cautious in the near term despite the reopening of China’s economy. Nevertheless, we anticipate DATV to improve in 2H23 on the back of a likely pause in US rate hike ahead after the recent 25bps increase in US Fed Funds rate to a range of 5%-5.25% in May 2023. A cessation in rate hikes in the US will likely to improve market sentiments, easing worries of a deeper recession. In the May policy statement, the Federal Open Market Committee’s (FOMC) tone was less hawkish, indicating that any additional rate hikes will depend on cumulative monetary policy tightening and other incoming data. This was a shift from Mar 2023, where some Fed members alluded that further policy tightening was appropriate.

• For derivatives trading, average total contracts traded declined to 71,366 in 1Q23 vs. 78,869 in 4Q22 and 77,513 in 1Q22, contributed by lower volatility of CPO prices. In comparison to 1Q22, average daily contracts (ADC) traded for FCPO slid by 9.4% YoY to 59,768 while FKLI fell marginally by 0.2% YoY to 11,330 in 1Q23.

• ADV from Bursa Suq-Al Sila (BSAS) climbed by 24.4% YoY to RM52.1bil in 1Q23 with a higher number of trading participants.

• Revenue recognised from carbon credit trading in 1Q23 was only RM26,000, coming from recently completed auctions. The trading of carbon credit has yet to commence as it is still pending completion of the platform in 2H23.

• Total operating income slipped by 5.3% YoY to RM157mil, driven largely by lower revenue from the securities market. Non-trading revenue grew by 5.8% YoY in 1Q23 supported by higher market data, member services, connectivity, conference fee, exhibition-related income, which was within Bursa’s target of a 5-7% growth in FY23 from FY22.

• Operating expenses grew by 10.6% YoY to RM80mil, underpinned by higher personal cost (increase in headcount for new business and added capacities), depreciation and amortisation coupled with marketing and business development expenses from spending on activities/events such as palm oil conference, Bursa RISE scheme and Invest Malaysia. IT maintenance cost rose by 18.7% YoY. This was contributed by the start of cybersecurity security solutions maintenance. As a result, the exchange recorded a higher cost-to-income (CI) ratio of 51.3% in 1Q23 compared to 43.9% in 1Q22.

• We maintain our assumption of a 6% growth in OPEX in FY23F, owing to additional headcount requirements for the exchange’s new businesses such as the voluntary carbon market (VCM), gold dinar and debt fundraising for SMEs. We understand that the CAPEX allocation for FY23 was RM60mil. Most of the non-IT expenditure has already been done with. Moving forward, the bulk of CAPEX spend will be on the platforms of new businesses and the refurbishment of existing IT systems.

• No dividends have been declared in 1Q23.

• Foreign ownership of the securities market declined slightly to 20.2% as at end-Mar 2023 compared to 20.6% in Dec 2022. Meanwhile, the stock’s foreign ownership remained steady at 13.8%.

• As the stock is trading at a fair 21x FY23F PE vs its 5-year historical average of 22x, we continue to see limited upside potential.

Source: AmInvest Research - 5 May 2023