Period  3Q14/9M14

Actual vs. Expectations The reported 3Q14 net profit of RM53.1m is much higher than our quarterly forecast of RM43.9m, raising the 9M14 net profit to RM145.1m which accounted for 80% of our fullyear estimate but was pretty much inline with the consensus at 75% full-year estimate.

Dividends  No dividend was declared in the 3Q as expected.

Key Result Highlights

9M14 vs. 9M13

 YoY, operating revenue grew 4.7% and net profit improved 4.2% despite higher staff cost and operation expenses of 12.7% and 11.3%, respectively. We understand that the higher staff cost was due to talent building efforts, which commenced in 2012. The higher operating expenses were also caused by increase in marketing and development costs due to greater retail outreach and engagement.

 The staff cost-to-total income ratio was higher at 25.2% as opposed to 23.3% in 9M13. The cost-to-income ratio (CIR) also increased to 46.1% from 45.4% despite depreciation and amortisation expenses declining 28.3% YoY (owing to a more cost efficient new trading system that was implemented in end-2013).

 Top-line growth, on the other hand, was supported by better equity market condition. The average FBMKLCI index and the average FBMKLCI market cap increased 8.0% and 10.2%, respectively, to 1,863 and RM1,043b (from 1,725 and RM947b). Consequently, we saw improvements in both Daily Average Trading Value (+3.6% YoY) and Volume (+49.0% YoY) to RM2.10b and 2.15b shares, respectively, as opposed to RM1.98b and 1.44b shares in 9M13.

 However, we saw a YoY decline of 4.2% in derivatives trading revenue despite higher trading volume due to lower guarantee and collateral management fees. We suppose this was due to the lower volatility of the benchmark index during the first 9 months of the year.

 Besides, a lower effective tax of 26.1% vs. 26.8% in 9M13 had helped in cushioning the higher cost and expenses.

3Q14 vs. 2Q14

 Operating revenue and net profit improved 4.8% and 13.3% QoQ, respectively, despite our earlier expectation of a weaker 3Q. Average daily trading value increased 7.2% QoQ (to RM2.20b from RM2.05b in 2Q14) while volume jumped 48.9% QoQ (2.67b shares vs. 1.80b shares).

 We believe the strong average daily trading value and volume were due to pent-up demand after a quiet 2Q14 (i.e. fasting month and FIFA World Cup) as well as strong retail interest and active trading in lower liners.

 Bottom-line growth was further boosted by lower staff cost (-9.2% QoQ) and depreciation & amortization expenses (-2.3% QoQ). Collectively, these lowered CIR to 42.9% as opposed to 46.6% in 2Q14.

Outlook  Nonetheless, Budget 2015 proved to be a non-event to the local equity market, as we saw no major surprises. We reiterate that the strong domestic liquidity position and the favourable seasonal pattern remain supportive.

 Based on our seasonal study, 4Q and 1Q are seasonally stronger. As such, we do not rule out that BURSA would benefit from such favourable trends in 4Q14.

 However, external factors such as: (i) Ebola outbreak, (ii) the upcoming US & Malaysia earnings reporting seasons, and (iii) weakening oil prices will continue to affect the market direction and sentiment going forward.

Change to Forecasts  Post the stronger 3Q14 results, we have revised our FY14E-FY15F earnings estimates to RM195.8m-RM210.1m from RM181.9m-RM201.5m. These figures imply 7.7%-4.3% upwards revisions.

Rating  Downgrading our call to MARKET PERFORM from OUTPERFORM as per our rating definition.

Valuation  Despite revising higher our earnings estimates and foreseeing stronger season quarters , we maintain TP of RM8.60, implying c.22x (vs. +1SD of 21.6x) to our FY15F revised EPS of 39.5 sen or 6.2x (vs. +2SD of 5.8x) to FY15F BPS of RM1.40, as these price multiples are at the higher end of the 3-year price multiple bands.

 Besides, we also reckon that the valuations/price multiples will be capped by the overall uncertainties and volatility of the domestic and global equity markets.

Risks to Our Call  An active trading range and better market trading activities.

Source: Kenanga