Bursa’s reported 1Q19 PATAMI of RM46.9m was below ours and consensus expectations. The poorer-than-expected results were due to lower-than expected average daily trading value (ADV) and derivative contract trade volume. We expect ADV to decline approximately 5% in FY19 given the high base effect in FY18. We had initially expected higher derivative trading volume in FY19 from FCPO and the launch of new derivative products by Bursa. Despite this, derivative trade volume in 1Q19 was below expectations. We lower our FY19/20 forecasts by 10.4%/8.1% to account for lower ADV and derivative trades. After accounting for our lower PE multiple and adjusted earnings, our TP falls to RM6.65 (from RM8.00). We downgrade our call from Buy to HOLD.

Below expectations. Bursa’s reported 1Q19 PATAMI of RM46.9m (QoQ: -9.6%, YoY: -26.5%) was below expectations, accounting for 19.6% and 20.7% of our and consensus full year estimates, respectively. The poorer-than-expected results were due to lower-than-expected average daily trading value (ADV) and derivative contract trade volume.

Dividend. None Declared (1Q18: None).

QoQ. Weaker derivative trading and listing services revenues were offset by higher conference and exhibition incomes (listed under ‘other revenue’), resulting in flattish revenue (+0.3%). Despite relatively stable top line, PATAMI decreased 9.6% to RM46.9m from (from RM51.9m) mainly due to higher staff cost.

YoY. PATAMI dived 26.5% of the back of weaker equity trading, derivative trading and listing service revenues. Despite higher effective clearing rate of 2.41 bps in 1Q19 (1Q18 2.31 bps), equity trading revenue was lower by 22.6% due to lower ADV (Figure #4) and lower trading velocity of 29% (1Q18: 35%). Lower FCPO contract trading volume (-19.3%) resulted in overall derivative trading revenue declining 13.8%. Lower listing and issuer services revenue were due to lower corporate exercises during the quarter.

Outlook. We expect ADV to decline approximately 5% in FY19 given FY18’s high base effect of ADV of RM2.6bn (driven by heightened trading post GE-14). We had initially expected higher derivative trading volume in FY19 from higher FCPO volumes (as FCPO contract trades tend to increase when CPO prices are weak) and the launch of new derivative products by Bursa such as palm olein futures ‘FPOL’ and Mini FTSE Bursa Malaysia Mid 70 Index Futures ‘FM70’. Despite this, derivative trade volume in 1Q19 was below expectations.

Forecast. We lower our FY19/20 forecasts by 10.4%/8.1% to account for lower equity ADV and derivative contract trading volume.

Downgrade to HOLD. We lower our PE multiple from 27x to 25x to reflect the subdued market activity in equity and derivative trading in FY19. After accounting for our lower PE multiple and adjusted earnings, our TP falls to RM6.65 (from RM8.00). We downgrade our call from a Buy to a HOLD. We expect tepid trading activity in FY19 to hinder profitability, particularly with shrunken foreign capital participation. Note that Malaysia has seen foreign capital outflow in eight of the ten months following GE14 (Figure 6), which has resulted in lower foreign market ownership (Figure 7).

Source: Hong Leong Investment Bank Research - 30 Apr 2019