Taking cue from 3Q21 ADV of RM2.9bn (-23% QoQ, -49% YoY) and ADC of 71k (-11% QoQ, +2% YoY), we estimate Bursa’s core earnings for the quarter could come in at RM66m (-26% QoQ, -46% YoY). If met, this would bring 9M21’s sum to RM276m (flat YoY), inline with our forecast. We envision a QoQ reprieve in ADV for 4Q21 on back of “reopening sentiment” and the return of foreigners. While our forecast and BUY rating is unchanged (weaker 2H pencilled in), we moderate down our TP to RM8.93 (24x mid-FY22 EPS).

3Q21 likely lower QoQ and YoY. Bursa’s 3Q21 results are tentatively scheduled for release on 29 Oct (during lunch break). Judging from 3Q21 securities ADV of RM2.89bn (-23% QoQ, -49% YoY) and derivatives ADC of 70.6k (-11% QoQ, +2% YoY), and barring any unforeseen swings in cost structure, we estimate that core earnings for the quarter could come in at RM66m. If our prediction is right, this would imply core earnings contraction of -26% QoQ (due to sequential fall in both ADV and ADC) and -46% YoY (steeper decline due to high base in 3Q20 which saw record quarterly earnings on back of all time high ADV: RM5.71bn).

9M21 may be flattish vs SPLY. Our 3Q21 core earnings estimate indicates that 9M21’s number could total RM276m, flattish vs SPLY (+1%). This would translate to 86% of our FY21 forecast (RM321m) which we would deem inline as our imputed full-year ADV assumption of RM3.54bn (-16% YoY; 9M21 actual: RM3.90bn) already implies that 2H ADV will be -40% lower vs 1H.

Normalising downwards. ADV has been down trending MoM from Feb (RM5.22bn) to Aug (RM2.56bn); however this recovered in Sept and MTD-Oct (RM3.07-3.17bn) on back of economic reopening sentiment, we believe. While this overall downward normalisation is expected as trading euphoria recedes (from the previous steep increase during 1Q20-1Q21), both YTD ADV (RM3.87bn) and current levels are still meaningfully above the pre-Covid highs seen in FY17-18 (RM2.31-2.39bn). Looking ahead into 4Q21, we reckon there could be some QoQ reprieve for ADV, perhaps around the low-RM3bn mark, which is our assumption for FY22 as well (RM3.11bn). This should be driven by continued “reopening recovery” sentiment and the traditional year-end window dressing phenomenon.

Return of foreigners? We think that foreign shareholding in Malaysian equities has scrapped the bottom of the barrel at 20.2% (July-Aug), before inching up to 20.4% in Sept. After 25 months of consecutive net selling by foreigners, the tide finally turned in Aug-Sept where they net bought RM1.92bn. There are some encouraging preliminary signs that foreign participation may be returning: (i) foreign ADV has been trending up from RM521m in July to RM652m in Sept (MTD-Oct: RM588m) and (ii) their participation rate rose from 17.3% in July to 21-22% in Aug-Sept (MTD-Oct: 18.5%).

Forecast. Unchanged – our existing forecast already pencils a weaker 2H21.

Maintain BUY but lower TP to RM8.93. Despite unchanged earnings forecast, we moderate down our TP from RM9.91 to RM8.93 as we (i) roll forward EPS from FY21 to mid-FY22 (lower earnings base) and (ii) lower PE multiple of 24x (from 25x) still based on +1SD above 5Y mean. While the upcoming results present another sequential earnings decline, this has already been baked into our forecast. We continue to like Bursa’s outlook, backed by (i) ADV recovery prospects in 4Q21, (ii) potential for another round of special-D (to recap, the previous earnings upcycle in FY17-18 saw 2 consecutive years of special dividend), on top of a decent normal yield of >4% and (iii) still the cheapest exchange – PE is at a 21% discount to regional peers (SGX, HKX, ASX and NZX). For a sanity check using an alternative valuation yardstick, Bursa’s MC/ADV of 2.0x isn’t excessive at -0.5SD below 10Y mean.

Source: Hong Leong Investment Bank Research - 13 Oct 2021