Bursa Malaysia’s (Bursa) 4Q19 net profit came in at RM45.6m (-12.1% yoy; -3.3% qoq) while 2019 net profit fell 17% yoy to RM185.9m. The results were within Affin’s and street estimates. Weak trading income, caused by prolonged trade tensions, geopolitical risks and outflow of foreign funds, has been the main factor for the decline in Bursa’s operating results. Higher investor risk-aversion was also reflected in a dip in the equity market’s velocity, from 32% in 2018 to 28% in 2019, while on-market equity average daily value (ADV) saw a pullback from RM2.39bn (2018) to RM1.93bn (2019). A final dividend of 10.4 sen (4Q18: 11.6 sen) has been proposed. Maintain SELL with an unchanged Price Target at RM5.15 (23x P/E target on 2020E EPS).

2019 Net Profit Declined by 17% Yoy on Weak Trading Sentiment

Bursa’s 2019 operating revenue contracted by 8.2% yoy as both securities market and derivatives market revenues dipped by 9.1% yoy and 9% yoy respectively. The bulk of Bursa’s operating profits (90.5%) came from the securities market division which saw profits declining 12% yoy on the back of lower securities market ADV (OMT and DBT) of RM2.15bn (-16.3% yoy), while the effective clearing fee rate remained unchanged yoy at 2.27bps. Meanwhile, the derivatives division saw operating profit down 14% yoy, primarily due to lower guarantee and collateral management fees as well as a decline in the higher-margin trading of FKLI and FPOL.

Notwithstanding Management’s Initiatives to Accelerate Growth

Notwithstanding Bursa’s management initiatives to future-proof the Exchange, such as an organisational restructuring (in November 2019), investing in new technology and tapping on new opportunities through international collaborations, we are of the view that headwinds such as the risk of a global epidemic from the coronavirus outbreak, and/or prolonged geopolitical and trade tensions will further weaken investor sentiment and drive fund outflows.

Maintain SELL; PT at RM5.15 (23x 2020E EPS)

Maintain SELL. Our Price Target is unchanged at RM5.15 (based on a 10-year mean P/E multiple of 23x on 2020E EPS). Our assumptions for 2020E-22E: an equity ADV of RM1.9bn and derivatives ADC of 48,000. We have also revised down our dividend payout ratio from 100% to 90%, as Bursa will be in cash-conservation mode, in our view. Upside risks: revival of investor confidence; firmer Ringgit; higher fee income

Source: Affin Hwang Research - 31 Jan 2020