Bursa Malaysia (BURSA) is set to release its 3Q15 financial results this Friday. Based on actual market statistics for July-September, we expect earnings to come in a tad weaker. Thus, we are cutting our quarterly revenue and profit forecasts by 0.3-3%. In our opinion, trading activities especially in the securities market is likely to stay lacklustre for the rest of 2015. Overall, we toned down our FY15- FY16 earnings estimates by 1-5%. All in, we maintain our MARKET PERFORM rating but the TP is reduced to RM8.10. This is based on an unchanged 22.5x FY16 P/E.

Cut 3Q15 revenue/earnings forecasts by 0.3%/3%. BURSA is set to release its 3Q15 financial results on 23 October. Based on actual market statistics for July-September, we expect earnings to come in a tad weaker. This is premised on the back of weak trading revenue from the securities market; actual average trading value was 1% lower than our original projection. That said, average volume for total futures contracts traded was above our expectations by +9%. However, as derivatives trading revenue only accounted for 27% total revenue, we still need to lower our 3Q15 by 0.3-3% to RM115m (-2% QoQ, -8% YoY) and RM46m (-7% QoQ & -13 YoY), respectively after updating the actual set of data into our model.

Outlook. No change to our view. Political uncertainty, weak commodities prices, weakening Ringgit, China’s economic slowdown and uncertainties on the US interest rates hike 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 exit. In turn, this will put a dent on stock trading volume given the cautious trading stance. The current upside in the market is only a temporary relief as challenging external headwinds still linger. To note, foreigners have been net sellers of Malaysian equities for the past one year and are most likely to stay away. Our strategist is now forecasting the local bourse to hit 1,680-points by end-2015, lower than the initial 1,845-points projection.

Forecasts. We expect 2015’s average trading value and volume for the equity market to be lacklustre at RM2.0bn (-2% YoY, previous forecast: RM2.03bn or -1% YoY) and 2.01bn shares (-3% YoY, previous forecast: 2.05bn shares, -2% YoY), respectively. As for the derivatives market, we expect average trading volume for total future contracts to rise 9.1% YoY to 33k contracts (previous forecast: 32k contracts or +4% YoY). After reflecting the abovementioned adjustments, we cut our FY15/FY16 earnings estimates by 1%/5% to RM190m/RM186m from RM193m/RM196m (4%/13% 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) higherthan- expected opex.

Valuation & recommendation. Following the downward revision in earnings, we reduced our TP to RM8.10 (from RM8.30), based on an unchanged FY16E P/E of 22.5x (-0.5SD below its 5-year average P/E). Hence, we maintain our MARKET PERFORM rating on the stock. For now, BURSA lacks re-rating catalysts. We do not expect to see 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 - 20 Oct 2015