We expect Bursa’s 2Q18 results to be in line although the stronger-than-expected ADV would be offset by a contraction in derivative volumes. We expect a weaker ADV of RM2.0b in 2H18 (1H18: RM2.7b). Weaker ADV expectations in 2019 and dividend yields declining to below its five-year mean of above 4.0% prompt us to downgrade the stock to SELL with an unchanged target price of RM6.72 (23.0x 2018F PE).

WHAT’S NEW

• 2Q18 results preview. Bursa Malaysia (Bursa) is slated to report its 2Q18 results on 30 July. We expect a net profit of RM61.4m, up 3.1% yoy but down 3.9% qoq. Results should be in line with expectations as the stronger-than-expected ADV in 2Q18 due to intense foreign outflows would likely be offset by contractions in derivative contract volumes and listing fees. Opex growth is likely to be well contained at 3%, leading to a stable cost-to-income ratio of 41-42%.

• 2Q18 ADV marginally above expectations due to intense foreign sell-off. Bursa’s 2Q18 securities ADV was RM2.6b, which was above our RM2.3b estimate due to the intense net foreign equity outflows in May 18 as a result of the unexpected 14th General Election (GE14) results. This led to a sharp mom spike in ADV from RM2.2b in Apr 18 to RM3.6b in May 18.

• ADV starting to normalise sharply downwards, retaining outlook of a weaker 2H18. ADV has normalised sharply downwards to RM2.0b in Jul 18 from May 18’s RM3.6b and 2Q18’s RM2.8b. In fact, we note that the higher-than-expected ADV in 2Q18 was largely due to spike in net foreign outflows which has tapered off from an average of RM291m per day in May-Jun 18 to RM101m per day in Jul 18 month-to-date. Coupled with the still uncertain external environment (global liquidity contraction and escalating US-China trade war), this is likely to lead to a weaker ADV in 2H18.

STOCK IMPACT

• Tapering off in foreign sell-off led to sharply lower ADV in Jul 18. Post GE14, net foreign equity flow reversed from a net inflow of RM380m in Jan-Apr 18 to a net outflow of RM10.5b in May-Jun 18, leading to a net outflow of RM6.8b in 1H18 which was a sharp reversal from 2017’s net inflow of RM10.8b. The sharp reversal in foreign equity flows post GE14 had led to sharp spike in post GE14 ADV and consequently helped to underpin a fairly robust ADV of RM2.67b in 2Q18. However, the intense sell-off by foreign institutional funds has tapered off significantly from an average net outflow of RM291m per day in May-Jun 18 to RM101m per day in Jul 18 month-to-date. This led to a sharp downward normalisation in ADV from RM2.67b in 2Q18 to RM2.0b in in Jul 18 month-to-date. Coupled with the ongoing external uncertainties which are likely to cap overall sentiment on the market, this prompts us to keep our more subdued 2H18 ADV assumption.

• Derivatives volumes remained weak in 2Q18. Total derivatives trading volumes declined 3.3% yoy and 0.5% qoq due to a sharp contraction in CPO futures contract volumes (-11.7% yoy) but this was partly offset by higher KLCI futures contract volume (+41.1% yoy) fuelld by heightened volatility in the FBNKLCI.

EARNINGS REVISION/RISK

• None.

VALUATION/RECOMMENDATION

• Downgrade to SELL with unchanged target price of RM6.72 (23x 2018F PE).

Weaker ADV expectations in 2019 and dividend yields declining to below its 5-year mean of above 4.0% prompt us to downgrade the stock to a SELL with an unchanged target price of RM6.72, or 23.0x 2018F PE. Our target price is based on -0.5SD to its historical mean PE of 25.0x, which we think is justified given greater market uncertainty on the back of contracting global liquidity and escalating trade tensions between the US and China. The stock’s PE had de-rated to 22-23x during the global financial crisis in 2008 and the European debt crisis in 2011.

Source: UOB Kay Hian Research - 23 Jul 2018