Investment Highlights

• We maintain our HOLD recommendation on Bursa Malaysia (Bursa) with an unchanged fair value of RM6.80/share, pegging the stock to FY24F PE of 22x. Our FV reflects a neutral 3-star ESG rating.

• We made no changes to our earnings estimates as 9M23 earnings were within expectations, accounting for 73.6% of our and 72.8% of consensus estimates. Likewise, we maintain our FY23F/24F/25F assumptions on daily average trading value (DATV) for the securities market of RM2.1bil/RM2.2bil/RM2.4bil.

• 9M23 core earnings of RM172mil declined by 3.2% YoY on the back of lower securities and derivatives trading revenue.

• However, Bursa reported a higher 3Q23 core earnings of RM60mil (+9.3% QoQ) after excluding the one-off reversal on SST provision of RM28mil in 2Q23. This was attributed to stronger securities market trading revenue. Its 3Q23 earnings were close to our estimate of RM58mil in our earlier report dated 20 October 2023.

• In 3Q23, DATV (of on-market transactions) for equities increased to RM2.1bil vs. RM1.8bil in 2Q23 and RM1.6bil in 2Q22. Aug and Sept 2023 saw DATV of more than RM2bil as aggressive interest rate hikes tapered in advanced economies, particularly US. For 9M23, DATV for the securities market stood at RM2.0bil.

• Velocity of the securities market was 29% in 9M23 vs. 30% in 9M23.

• In 9M23, trades by foreign investors rose to 27.9% vs. 26.8% in 9M22. The mix of shares traded by retail investors was slightly higher at 27.8% in 9M23 (9M22: 26.6%) while the share of domestic institutional trades fell to 44.2% in 9M23 vs. 46.7% in 9M22.

• 3Q23 saw foreign fund inflows into the securities market of RM2.2bil cumulatively vs. outflows of RM2.3bil in 2Q23 and RM1.9bil in 1Q23. With the inflow of funds in 3Q23, the year-to-date (until Sept 2023) cumulative net foreign fund outflows were reduced to RM2bil from -RM4.2bil in 1H23. Nevertheless, re-emerging market concerns of the Federal Reserve holding US interest rates higher for longer saw outflows of RM2.24bil cumulatively from the securities market in the month of Oct (1 to 30 October 2023). 10-year US Treasury yield surged to 4.9% as at 30 October 2023 from 4.1% in Aug 2023, impacting valuations of bonds and securities portfolios.

• We maintain our expectation of a higher securities market trading revenue in 2H23 compared to 1H23. However, market sentiment is expected to remain cautious. Financial markets are likely to continue to be volatile, contributed by noises on the direction of US interest rates, volatile commodity prices, stresses in China’s real property sector which have yet to see a strong recovery as well as ongoing geopolitical tensions with the latest being the Israel-Palestine conflict.

• For derivatives trading, average total contracts traded fell by 5.4% YoY to 74,268 in 9M23 due to lower volatilities for FCPO and FKLI. In 9M23, the average daily contracts (ADC) traded for FCPO slid by 7% YoY to 62,221 while ADC for FKLI rose by 3.2% YoY to 11,848.

• Operating revenue of Bursa slipped by 0.8% YoY to RM442mil, contributed largely by lower trading revenue (- 4% YoY). In contrast, non-trading revenue grew by 5% YoY in 9M23, supported largely by higher revenue from data business with an increase in subscribers and revision in fees. Also, it was contributed by an increase in conference fee and exhibition-related income following a higher number of participants for palm oil conferences.

• The exchange reported a cost-to-income (CI) ratio of 45.6% in 9M23.

• SST on brokerage fees will continue to be exempted. Meanwhile, on the capital gains tax of 10% announced in Budget 2024 on unlisted companies, we understand that exemption will be granted for IPOs approved by Bursa as well as restructuring of shares within the similar group.

• Headline financial KPI targets for FY23F were unchanged as the group is on track to meet them. The exchange has achieved the value of RM10bil targeted for IPOs. Nevertheless, the number of IPOs of only 25 in 9M23 (9M22: 28) were short of its target of 39 in FY23F. This was due to a lower-than-expected number of IPOs for the Leap Market. Bursa is now targeting 31 IPOs in FY23F.

• The stock is trading at a fair 22x FY24F PE with a decent dividend yield of 4.2%. Hence, we continue to see limited upside potential.

Source: AmInvest Research - 1 Nov 2023