Bursa reported 3QFY19 PATMI of RM47m (+2% QoQ, -6% YoY), bringing the 9MFY19 sum to RM140m (-19% YoY); falling short of both us and consensus, with lacklustre ADV as the culprit. Despite Oct witnessing the tabling of Budget 2020, ADV continued to slip for the 3rd consecutive time MoM. We expect FY19 ADV to end -21% lower YoY (YTD actual: -23%). Given the results shortfall and change in analyst coverage on the stock, we cut FY19-21 earnings by 7%/14%/14%. Maintain HOLD with lower TP of RM6.13, based on 26x PE (Asian peers) tagged to FY20 EPS.

Below expectations. Bursa posted 3QFY19 PATMI of RM47.1m (+1.7% QoQ, -6.2% YoY), bringing the 9MFY19 cumulative sum to RM140.3m (-18.5% YoY). The latter formed 71% of both ours and consensus full year forecast which is below expectations. The results shortfall was mainly due to lower-than-expected equities ADV at RM1.98bn in 9MFY19 (-23.2% YoY; 9MFY18: RM2.57bn).

QoQ. Revenue was rather flattish (-0.9%) as decline in securities revenue (-5%; from lower ADV by -8%) was offset by better showing for derivatives revenue (+9.2%). The increase for the latter was primarily driven by FCPO (ADC +18%). Despite flattish topline, PATMI showed a slight growth of 1.7%; this came on back of a -5.2% decline in staff and operating expense.

YoY. Revenue fell -4.6%, primarily due to the decline in securities revenue (-8.8%; ADV down -17%). In tandem with the revenue decline, PATMI decreased by -6.2%. While most cost parameters reduced, these gains were offset by declines in other income (-29%) and interest income (-19.1%).

YTD. Revenue declined -11.1% driven by (i) -16.4% fall in securities revenue following -23.2% drop in ADV; recall that last year’s ADV was boosted by heightened equities trading pre and post GE14 and (ii) -10.1% decrease in derivatives revenue on lower ADC (FCPO: -4.7%, FKLI: -13.4%). While key cost parameters (staff, opex and D&A) were collectively reduced by -2.1%, this was offset by lower other income and (- 15.6%) and interest income (-17%). All in, PATMI decreased -18.5%.

Outlook. Despite Oct witnessing the tabling of Budget 2020, equities ADV fell slightly MoM to RM1.69bn (3rd consecutive MoM decline). This brings the YTD sum (c.10M) to RM1.95bn (-22.8% YoY; 10M18: RM2.52bn). We have pencilled an ADV of c.RM1.9bn for FY19, implying a -21% YoY decline. Looking ahead, our assumption entails flattish ADV for FY20 and a subsequent 10% recovery in FY21. A significant structural resolution to the US-China trade war would be one of the key reasons for us to relook into our ADV assumptions (i.e. lower risk aversion to equities).

Forecast. Given the results shortfall and change in analyst coverage on the stock, our FY19-21 earnings forecast are cut by 7.6%, 14.2% and 14.4% respectively. This imputes the abovementioned ADV assumptions and removal of MI in FY20 (from acquiring the remaining 25% stake in Bursa Malaysia Derivatives from CME; target completion in Dec).

Maintain HOLD, TP: RM6.13. Our RM6.13 TP (from RM6.75) on Bursa is based on a 26x PE multiple tagged to FY20 EPS. The applied multiple corresponds to the current average 1-year forward PE of Asian exchanges (i.e. SGX, HKX and Bursa). While Bursa’s accreditation of Shariah status (in May) has opened doors to a new pool of investable funds, we reckon that this positive will be dampened by lacklustre ADV which has yet to show credible signs of a turnaround. Bursa currently trades at FY19- 20 PE of 27x and 25.7x respectively, in between its 5-year mean (23x) and +1SD (27.8x).

Source: Hong Leong Investment Bank Research - 5 Nov 2019