Bursa Malaysia (BURSA) is set to release its 2Q15 financial results next week. Based on actual market statistics for April- June, we expect earnings to come in a tad weaker. Thus, we are cutting our quarterly revenue and profit forecasts by 3-4%. In our opinion, trading activities, especially in the securities market, are likely to stay lacklustre for the rest of 2015. Overall, we have toned down our FY15-FY16 earnings estimates by ~3%. All in, we maintain our MARKET PERFORM rating on the stock but its TP is lowered to RM8.30 (from RM8.50). This is based on an unchanged 22.5x FY16 P/E.

Cut 2Q15 revenue/earnings forecasts by 3%/4%. BURSA is set to release its 2Q15 financial results on 15 July. Based on actual market statistics for April-June, we expect earnings to come in a tad weaker. This is premised on the back of weak trading revenue from the securities market. Over the 3 months, actual average trading value and volume were 5-7% lower than our original projections. That said, higher trading revenue from the derivatives market should be able to cushion the slowdown; average volume for total futures contracts traded was in line with our expectation. After updating the actual set of data into our model, we lower our 2Q15 revenue and earnings estimates by 3-4% to RM118m (-1% QoQ, +3% YoY) and RM49m (+4% QoQ & YoY), respectively.

Outlook. No change to our view. Political uncertainty, on-going debt crisis at Greece and China’s stock market meltdown will continue to cast a long shadow over market sentiment. Hence, the current choppy market environment is likely to stay, driving investors to the sideline or to exit. In turn, this will put a dent to stock turnover volume given cautious trading stance. So far, 2Q15 market velocity remained tepid at 29% (1Q15: 29%; 2Q14: 30%). To note, foreigners have been net sellers of Malaysian equities for the past one year and they are unlikely to return anytime soon. Our strategist is now forecasting the local bourse to hit 1,810-point by end-2015, lower than the initial 1,845-point projection.

Forecasts. We expect 2015’s average trading value and volume for the equity market to be lacklustre at RM2bn (-1% YoY, previous forecast: RM2bn or -1% YoY) and 2bn shares (-2% YoY, previous forecast: 2.1bn shares or +1% YoY), respectively. As for the derivatives market, we expect average trading volume for total future contracts to remain at +4% YoY or 32k contracts (previous forecast: 32k contracts or +4% YoY). After reflecting the abovementioned adjustments, we cut our FY15/FY16 earnings estimates by 3%/3% to RM193m/RM196m from RM199m/RM203m (4%/11% below consensus).

Risks. The key risks to our forecasts are: (i) lower-than-expected trading volume in the securities and derivatives markets along with (ii) higher-than-expected opex.

Valuation & recommendation. Following the downward revision in earnings, we reduce our TP to RM8.30 (from RM8.50), based on an unchanged FY16 P/E of 22.5x (-0.5SD below its 5-year average P/E). This is also in line with the valuation multiples of its regional peers. Hence, we maintain our MARKET PERFORM rating on the stock as we see no immediate re-rating catalysts for now. We do not expect any special dividend payout in the next two years given its diminished cash reserves. That said, it is still a debt-free company.

Source: Kenanga Research - 10 Jul 2015