Taking cue from 3Q22 Securities ADV of RM1.6bn (-24% QoQ, -44% YoY) and Derivatives ADC of 81k (+5% QoQ, +15% YoY), we estimate Bursa could post earnings of RM52m (-12% QoQ, -35% YoY) when results are released on 31 Oct. While external headwinds aren’t likely to dissipate anytime soon, we see a potential trading opportunity on Bursa given the impending GE15. Two out of the past three GEs (i.e. GE14 and GE13) saw ADV surge 55% and 52% over the 1M period after the polls compared to the 1M period before. Bursa’s share price has a strong 78% monthly correlation to ADV. We tactically upgrade our rating on Bursa from Sell to BUY with higher TP of RM7.00 (from RM5.65) based on 24x mid-FY22 EPS.

3Q22 should be weaker QoQ/YoY. In 3Q22, Securities ADV continued its decline at RM1.62bn (-24% QoQ, -43.9% YoY) while Derivatives ADC was higher at 80.9k (+5.0% QoQ, +14.6% YoY). Assuming Other revenue continues its quarterly run rate of c.RM57m, alongside marginal sequential decline in opex (which fell -3.8% to -2.4% QoQ over the past three quarters), we estimate that earnings in 3Q22 could come in at RM52m (-12.1% QoQ, -34.6% YoY). If accurate, this would bring 9M22’s earnings to RM180m (-38.1% vs SPLY), accounting for 79% of our full year forecast (consensus: 77%), which we would deem inline.

Slight reprieve but still meek. Investor risk aversion remains heightened given broader external headwinds stemming from Fed’s aggressive tightening, EU’s energy uncertainty, Russia-Ukraine war and China’s zero-Covid policy. Adding fuel to fire is the impending national polls, which is scheduled for 19 Nov. Nevertheless, coming off a decade low of RM1.34bn in Jul, monthly ADV saw some reprieve in Aug/Sep/MTD Oct at RM1.74/1.76/1.69bn. Granted, this is still meek compared to the highs of RM4.21/3.55bn in FY20/21, or even against FY19’s RM1.93bn.

Worth a trade as an apolitical election play. While we are cognisant that these external headwinds aren’t likely to dissipate anytime soon, we see a potential trading opportunity on Bursa at current levels given the impending polls. Two out of the past three GEs (i.e. GE14-2018 and GE13-2013) saw ADV surge 54.5% and 52.4% over the 1-month period after the polls compared to the 1-month period before (see Figures #3-4). The exception was GE12-2008 – where ADV fell -13.9% over that said horizon (Figure #2) – likely due to the onslaught of the GFC. Bursa’s market cap (and hence share price) has a strong correlation to its ADV at 78% based on monthly data post GFC. We view Bursa as an apolitical election play – it benefits via ADV boost but without the “political linkages” – making this a rather compelling trade.

Forecast. Unchanged pending Bursa’s 3Q22 results release on 31 Oct. Our FY22 ADV assumption of RM2.06bn (-42% YoY) implies a sequential recovery in 4Q22 at RM1.87bn – there is plausible upside to this should our post-GE15 ADV boost thesis pan out.

Tactically upgrade to BUY, TP raised to RM7.00. Our valuation horizon is rolled forward from FY22 to mid-FY23 and we also raise our PE target from 20x to 24x (+1SD 5Y). We reckon our valuation yardstick isn’t excessive considering this is still at a discount to regional peers’ 5Y mean (25.1x). We tactically upgrade our rating on Bursa from Sell to BUY with higher TP of RM7.00 (from RM5.65). With the clock counting down to GE15, we believe investors will start angling on Bursa to ride on the potential near term ADV surge post polling. To recap, during the last election in 2018 (GE14), Bursa’s PE rerated from around mean to peak at +1.7SD (26.7x). In addition, the stock’s foreign shareholding is at a low (Aug: 13.6%), even below the Covid -crisis bottom of 14.7% (May-20).

Source: Hong Leong Investment Bank Research - 21 Oct 2022