Period  1Q14

Actual vs. Expectations The reported 1Q14 net profit of RM45.1m is within expectations, accounting for 24.8% and 23.5% of our full-year estimate of RM182.0m and consensus’ estimate of RM192.5m, respectively.

Dividends  No dividend is declared as expected.

Key Result Highlights

1Q14 vs. 1Q13

 YoY, operating revenue and net profit grew 13.2% and 18.2% respectively. The higher profitability is in line with the stronger equity market performance.

 The average FBMKLCI index and the average FBMKLCI market cap increased 10.6% and 14.9%, respectively, YoY, leading to a much strong market performance. We saw tremendous leaps in both Daily Average Trading Value (+25.9% YoY) and Volume (+96.4% YoY) to RM2.1b and 2.0b shares, respectively, (from RM1.6b and 1.0b shares respectively) during the quarter. We suppose this is due to the strong underlying liquidity. Besides, the market also saw higher trading participation from retail investors apart from continued support by domestic institutions.

 However, we saw a YoY decline of 6.9% in derivatives trading revenue despite higher trading volume due to lower guarantee and collateral management fees.

 While staff cost-to-total income ratio was higher at 26.4% as opposed to 24.6% in 1Q13, the cost-toincome ratio (CIR), however, improves to 48.9% from 49.7%. This is due mainly to lower (-26.8% YoY) depreciation and amortisation expense. We understand that the lower depreciation was due lower investment in new trading system.

 Besides, a lower effective tax of 25.5% vs. 27.3% in 1Q13 helped in lifting the bottom-line growth.

1Q14 vs. 4Q13

 Operating revenue and net profit increased 10.8% and 33.4% QoQ, respectively, inline with better market condition i.e. higher average daily trading value (RM2.1b vs. RM1.59b) and volume (2.0b shares vs. 1.5b shares). Besides, the derivatives market also showed a 4.8% QoQ increase in revenue attributed to higher CPO (crude palm oil) contracts volume traded due to the recent run-up in CPO prices.

 The bottom-line growth was also further boosted by lower staff cost and depreciation & amortisation expense as opposed to previous quarter. CIR was only registered at 48.9% in 1Q14 vis-à-vis 57.6% in 4Q13. The higher operating expenses in 4Q13 could be due mainly to staff remuneration where staff cost-to-income ratio registered a high level of 31.6% as opposed to 26.4% in 1Q14.

 Besides, the effective tax rate was also lower at 25.5% as opposed to 27.7% in previous quarter.

Outlook  Our market view remained unchanged. We still believe that the underlying liquidity position should remain supportive for the local market (with decent upside).

 However, we do not rule out a possible scenario of quieter months in June and July due to the fasting month and FIFA World Cup.

Change to Forecasts  We have factored in slower market activities in end-2Q14 and early-3Q14.

 No major revision in our earnings estimates after the fine-tuning. We are still estimating FY14E and FY15F net profits to register at RM181.9m and RM201.5m (vs. our previous estimates of RM182m and RM200m), respectively.

 However, we have fine-tuned our DPS estimates by fixing a payout ratio at 95%, in line with the 4-year historical average. As such, our FY15F DPS is revised to 36.0 sen from 32.0 sen previously. However, our FY14 DPS remains unchanged at 32.0 sen. This will translate into dividend yields of 4.2%-4.7%.

Rating  We upgrade our rating from MARKET PERFORM to OUTPERFORM as we see higher upside after rolling over our valuation base year to FY15E from FY14E previously.

Valuation  Nonetheless, we still maintain our Target Multiples.

 We have employed a PER of 23.7x and a PBV of 5.2x, which are the +2SD-level for both price multiples, to derive our target price.

 We have revised up our Target Price as we start to roll over our valuation base year to FY15E.

 Based on our estimated FY15 EPS and BPS of 37.8 sen and RM1.56, we raised our Target Price to RM8.60 (from RM8.10 previously), suggesting >13% upside from here.

Risks to Our Call  A tighter trading range and slower market trading activities.

Source: Kenanga