Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM148m (+2% YoY) was in line with our and consensus estimates, making up 77/75% of the full-year forecasts.

Dividends

As expected, no dividend was declared in the 3Q as in previously practised.

Key Results Highlights

9M15 vs. 9M14, YoY

Net profit grew by 2.0% in tandem with operating revenue growth of 3%.

Operating revenue was driven by a surge in derivatives revenue, which advanced 24% (9M14:-4.2%) but mitigated by drop in revenue from securities market (- 4%).

Drop in securities revenue was attributed to lower retail participation.

Stable revenue segment improved by 1ppts to 5% due to better performances by depository and market data services. Excellent performance from the Bursa Suq Al- Sila trading revenue (+84%) aided the increase in the stable revenue segment.

Bursa Suq Al Sila revenue improved significantly as its Average Daily Volume increased by 138% to RM14b.

Cost-to-income ratio (CIR) fell by 1ppts to 46% as staff costs and operating expenses grew by a meagre 1.7% and 2.6%, respectively (9M14: 13% and 11%). 3Q15 vs. 2Q15, QoQ

Earnings increased 4% thanks to lower opex (-1%).

Growth in Operating revenue was lethargic (+1%) despite the surge in revenue from the derivatives market of 23%.

Change to Forecasts

We tweaked our forecast slightly given the new set of numbers in 3Q15. We revised our growth for FY16; (i) securities revenue at +1.6% (from +5% previously); ii) derivatives revenue at +1.6% (from -1.2% previously). The positive performance of the derivatives revenue will not have any significant impact in total operating revenue as it contributed less than 20% of operating revenue. Furthermore, given the tapering volatility of the Ringgit, so will the volatility of the Futures market. No change in earnings growth for FY15 but lower CIR. We assumed a lower CIR at 46%/47% (previously 47%/50%) for FY15/FY16. Our new earnings forecasts are now at RM194/185m for FY15/FY16 (A revision of +2.4%/-0.6%).

Rating

Maintain MARKET PERFORM

Limited upside with lack of re-rating catalysts on the horizon.

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.

Valuation

Following the downward revision in earnings, we reduced our TP to RM8.00 (from RM8.10), based on an unchanged FY16E P/E of 22.5x (-0.5SD below its 5- year average P/E). We feel the P/E is justified given global peers are trading at a forward P/E of 21x.

Key Results Highlights

9M15 vs. 9M14, YoY

Net profit grew by 2.0% in tandem with operating revenue growth of 3%.

Operating revenue was driven by a surge in derivatives revenue, which advanced 24% (9M14:-4.2%) but mitigated by drop in revenue from securities market (-4%). The securities trading revenue decreased due to lower participation from retail investors and domestic institutions.

Derivatives revenue lifted due to the volatility in CPO prices and FBMKLCI futures.

Drop in securities revenue was attributed to lower retail participation; (i) average daily value dropped by 6%(9M14; +6.0%), (ii) market capitalisation declined by 10% (9M14:+9.6%), and (iii) funds raised from new listings and secondary market fell overwhelmingly by 41%.

The Stable Revenue segment improved by 1ppts to 5% due to better performances by depository and market data services, which improved by 7% and 10%, respectively (9M14: -5% and 16% respectively). Excellent performance from Bursa Suq Al-Sila trading revenue (+84%) aided the increase in the Stable Revenue segment. However, a drop of 5% in revenue from listing & issuer services (9M14: -9%) mitigated the performances of the stable revenue segment.

Bursa Suq Al Sila revenue improved significantly as its Average Daily Volume increased by 138% to RM14b. However, performances of the Islamic Capital Market mirrored the Capital Market where: (i) the volume of listed Sukuk fell by 9% to RM33b, and (ii) market capitalisation of Shariah Compliant Stocks dropped 5% to RM1.02b.

Cost-to-income ratio (CIR) fell by 1ppts to 46% as staff costs and operating expenses grew by a meagre 1.7% and 2.6%, respectively (9M14: 13% and 11%). 3Q15 vs. 2Q15, QoQ

Earnings increased 4% thanks to lower opex (-1%). That said, the performance was capped by flat operating revenue (+1%).

Operating revenue was lethargic despite the surge in revenue from the derivatives market of 23%. Revenue from the securities market and stable revenue segment were weak at -2.0% and -5%, respectively.

Outlook

No changes to our view.

Political uncertainty, volatile commodities prices, weakening Ringgit, China’s economic slowdown and uncertainties on the US interest rate hikes 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. Up to 9M15, total net foreign outflow from the Malaysian market reached RM18.2b compared to an outflow of RM7b in the whole of 2014.

Our strategist is now forecasting the local bourse to hit 1,715 (vs. 1,680 previously) by end-2015, which is still lower than the initial 1,845 projection in early of the year.

Risks to Our Call

Lower-than-expected trading volume in the securities and derivatives markets.

Higher-than-expected opex.

Source: Kenanga Research - 26 Oct 2015