Investment Highlights

• We maintain our HOLD recommendation on Bursa Malaysia (Bursa) with a revised fair value of RM6.50/share from RM6.80/share, pegging the stock to an unchanged FY23 P/E of 22x, on par to its 5-years historical average.

• Our FY23F/24F/25F earnings have been tweaked lower by -3.8%/-7.1%/-6.2% to reflect lower daily average trading value (DATV) assumptions for the securities market. No changes to our 3-star ESG rating.

• 2Q23 QTD (Apr-May 2023) saw the DATV of on-market transactions for equities declined to RM1.8bil vs. RM2.1bil in 1Q23. In Apr/May 2023, DATV slipped to RM1.7bil/RM1.9bil from RM2bil in Mar 2023 due to concerns on weaker commodity prices, higher interest rates in developed economies and global growth outlook.

• Apr/May 2023 saw continued outflow of foreign funds from the securities market of RM0.3bil/RM0.7bil albeit lower than the withdrawals of RM1.2bil in Mar 2023.

• Year-to-date (YTD) up until May 2023 we have seen a cumulative outflow of RM2.8bil of foreign funds from the securities market vs. an inflow of RM4.4bil in 2022 (Exhibit 3). The exit of foreign funds from the local securities market represents the 2nd largest outflow in the region after Thailand.

• Velocity of the securities market was marginally lower at 29% in 2Q23 vs. 30% in 1Q23.

• In May 2023, trades by institutions accounted for 43% of the total value of securities traded vs. 46% in Mar 2023. The mix of shares traded by retail investors slipped to 26% while that of foreign investors climbed to 31% in May 2023 compared to 26% in Mar 2023.

• We continue to expect the DATV for the securities market to be weak in 1H23, contributed by i) hawkishness of interest rate hike outlook and concerns on elevated inflation in advanced economies, and ii) banking sector stress in the US. Investment sentiment is expected to remain cautious in the near term as China’s economic recovery remains fragile with the country resorting to cut its key policy rate by 10bps recently to support the economy.

• The Federal Reserve Open Market Committee (FOMC) has kept the US Fed rate unchanged at 5%-5.25% at the recent meeting in June 2023. However, interest rate projections have changed, and based on the latest DOTs plot, the terminal or peak Fed rate is projected to be higher at 5.6% compared to 5.1% in Mar 2023, thus implying a potential further 2 interest rate hikes in the US of up to 50bps cumulatively in 2023. Also, the present DOTs plot graph indicates a possibility of rate cuts in the US in 2024. We see funds flows into the securities market to be challenged by the attractiveness of investments into bonds based on the projection of interest rate movements in the US.
  
  With the Fed still hawkish on interest rates in the near term, we expect volatility in the markets to persist as market sentiment on the local securities market is likely to remain cautious in 3Q23. Hence, we are revising our DATV assumptions for the securities market lower for FY23F/24F/25F to RM2.1bil/RM2.3bil/RM2.5bil from RM2.3bil/RM2.6bil/RM2.8bil.

• For derivatives trading, the average total traded contracts climbed to 81,964 in 2Q23 vs. 71,366 in 1Q23. In comparison to 1Q23, the average daily contracts (ADC) traded for FCPO rose by 18% to 70,526 while FKLI fell marginally by 0.5% to 11,273. In FY23F/24F/25F, we have penciled forecast assumptions of average derivatives contracts traded of 80,000/75,000/70,000.

• Foreign ownership of the securities market inched lower to 20% in May 2023 compared to 20.2% in Mar 2023. Meanwhile, the stock’s foreign ownership remained steady at 13.7% as at the end of May 2023.

• The stock is trading at a fair 21.3x FY23F PE (vs. its 5-year average of 22x) with limited upside potential. Dividend yield is decent at 4.4% for FY23F.

Source: AmInvest Research - 21 Jun 2023