Judging from 1Q21 ADV/ADC of RM5.08bn/79.9k (+5%/+13% QoQ, +101%/-7% YoY), quarterly core earnings could come in at RM108m, implying -8% QoQ (fewer trading days) but +67% YoY. The market’s volatile recovery path, structurally higher retail participation and potential return of foreigners all augur well for ADV. We raise FY21/22 earnings by 4%/8% and introduce FY23 forecast. Maintain BUY with slightly higher TP of RM11.49 (29x FY21 EPS).

1Q21 may be lower QoQ but significantly higher YoY. Judging from 1Q21 ADV of RM5.08bn (+5.2% QoQ, +100.8% YoY) and ADC of 79.9k (+12.5% QoQ, -7.1% YoY), and barring any unforeseen swings in cost structure, we estimate that core earnings for the quarter could come in at RM108m (forming 35% of our initial FY21 earnings forecast and 32% of consensus). If met, this implies a -7.9% QoQ dip in core earnings as higher ADV/ADC (+5.2%/+12.5%) is more than offset by fewer trading days (1Q21: 60 vs 4Q20: 64). For clarification, core earnings in 4Q20 of RM117.4m is derived after removing RM12.5m in SST provisions (our estimate based on management’s guided range). On a YoY basis, our 1Q21 core earnings estimate suggests a 66.9% jump as ADV doubled. 1Q21 results are tentatively due for release on 27 Apr.

Robust ADV in 1Q but what lies ahead? We maintain our rather consensus view that 2021 will be a vaccine led recovery year. However, speedbumps such as vaccine hiccups (e.g. concerns over AZ and J&J), Covid resurgence, geopolitical tensions (i.e. US-China) and fluid domestic politics will bring much volatility along this recovery path, possibly inducing heightened trading activity. All in, we have pencilled in ADV of RM3.43bn for FY21, which is lower than FY20’s exceptional RM4.21bn but still much better than the pre-Covid highs of RM2.3-2.4bn (FY17-18). Timeline wise, we expect ADV to soften QoQ in 2Q21 but regain momentum in 2H21 as “election trading” sets in, particularly amongst local investors, taking cue from the “state of emergency” which is slated to end on 1 Aug.

Retail participation stays strong. Average retail participation in 1Q21 stood at 39.3% (retail ADV: RM1.99bn) alongside net buys of +RM5.36bn (4Q20: 40% (retail ADV: RM1.92bn) and +RM2.63bn). We believe that retail participation is now on a structurally higher base with the average participation rate at 39.6% post automatic loan moratorium vs the 10Y pre-Covid mean of 24%. In our view, this should lend some downside support to the market.

Envisioning the return of foreigners. Foreign shareholding of 20.3% (end-Mar) is at a record low, even below the GFC trough of 20.7%. However, we reckon green shoots are emerging with 4Q20 vs 1Q21 numbers seeing (i) foreign participation rising from 15% to 16.7% (foreign ADV rose from RM0.73bn to RM0.86bn) and (ii) their net selling tapered from -RM2.29bn to -RM1.73bn. At current foreign shareholding levels, we reckon the base appears palatable to envision their re-entry, especially if they turn “risk on” amid a vaccine driven recover climate. However, we are cognisant that fluid domestic politics remain the key risk to our return of foreigners view.

Forecast. We raise FY21/22 ADV by 2.1%/5.0% to RM3.43/3.09bn (YTD up to 13 Apr: RM4.88bn) to reflect (i) stronger-than-expected 1Q21 and (ii) structurally more vibrant retail base. Consequently, FY21/22 earnings are raised 3.7%/7.6%. Introduce FY23 numbers.

Maintain BUY, TP: RM11.49. We inch up our TP to RM11.49 (from RM11.46) which is based on 29x PE tagged to FY21 EPS. Our applied PE multiple is (i) +2SD above 5Y mean, justified by an earnings base that is higher than its pre -Covid peak earnings (i.e. FY18 which saw PE rerating to that level) and (ii) inline with its regional peers average (SGX, HKX, ASX and NZX).

Source: Hong Leong Investment Bank Research - 15 Apr 2021