Bursa’s 2Q18 results were below expectations due to lower-than-expected effective clearing fee rate, as the sharp sell-off by foreigners post GE14 resulted in higher institution participation. We expect a weaker ADV of RM2.0b in 2H18 (1H18: RM2.7b). We trim our target price to RM6.50 (23.0x 2018F PE) post earnings revision. Weaker ADV expectations in 2019 and above-mean PE valuations (27.5x vs mean of 25.0x) prompt us to maintain our SELL recommendation.
RESULTS
Marginally below. Bursa Malaysia (Bursa) reported a 2Q18 net profit of RM58.2m (-2.8% yoy, -7.8% qoq) which was 4.0% below our estimates due to lower-than-expected effective clearing fee rate. Despite a 2.7% yoy increase in 2Q18 average daily trading value (ADV), the group reported a 1.8% yoy contraction in securities trading revenue on the back of a lower effective clearing fee rate of 2.15bp vs 2.34bp in 2Q17. On the flip side, opex was well contained, remaining flat yoy and leading to a fairly stable cost-to-income ratio of 42.9% in 2Q18 (vs 42.7% in 2Q17).
Sharp qoq decline in revenue and earnings. On a qoq comparison, revenue declined by a sharper 7.3% qoq vs a more modest 2.8% qoq and 2.2% qoq decline in ADV and derivative trading volumes respectively due to a drop in effective clearing fee rate to 2.15bp vs 2.31bp in 1Q18 (10-year historical average 2.30bp). The decline in effective clearing rate in 2Q18 was attributed to the sharp increase in foreign institutional equity sell-off which drove up institutional securities market trading participation from 76% in 1Q18 to over 78% in 2Q18, and consequently lowered effective clearing fee rate given the maximum cap of RM1,000/contract.
STOCK IMPACT
ADV starting to normalise sharply downwards; retaining outlook of weaker 2H18. ADV has normalised sharply downwards from May 18’s RM3.6b and 2Q18’s RM2.8b to RM2.0b in Jul 18. In fact, we noted that the higher-than-expected ADV in 2Q18 was largely due to a spike in net foreign outflows which has tapered off from an average of RM291m/day in MayJun 18 to RM101m/day in Jul 18 month to date. This, coupled with the still uncertain external environment (global liquidity contraction and escalating U.S-China trade war), is likely to lead to a weaker ADV in 2H18.
ADV assumptions for 2H18. We are expecting ADV to average at RM2.0b for 2H18, which incorporates the following quarterly ADV assumptions of: a) 3Q18: RM1.95b and b) 4Q18: RM2.0b vs 1H18’s RM2.67b. On a yoy comparison it would reflect a 4% yoy decline from 2H17’s ADV of RM2.12b.
Weaker 2019 trends from a high base in 2018. We are expecting ADV to soften marginally in 2019 to RM2.20b from RM2.32b in 2018 given the high-base effect of 1H18’s RM2.7b ADV. This, coupled with a modest 3.0% derivative volume growth assumption implies a potential 2.7% contraction in FY19 earnings (vs +4.7% in FY18).
Derivatives volumes remained weak in 2Q18. Overall 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) fuelled by heightened volatility in the FBMKLCI.
EARNINGS REVISION/RISK
Factoring in the lower-than-expected effective clearing fee rate in 2Q18 but partly mitigated by better-than-expected cost discipline, we trim our FY18 earnings by 3%.
VALUATION/RECOMMENDATION
Maintain SELL with lower target price of RM6.50 (23x 2018F PE) post earnings revision. Weaker ADV expectations in 2019 and dividend yields declining to below its 5- year mean of above 4.0% prompt us to retain our SELL recommendation. 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, while current valuations at 27.5x 2018F PE is above its historical mean of 25.0x.
Source: UOB Kay Hian Research - 31 Jul 2018
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