Bursa Malaysia (BURSA) is poised to announce its 4Q15 financial results next week. We see potential downside risk to our earnings estimates and adjust our 4Q15 forecast operating revenue and earnings estimates by -1% and -1.7% respectively. For 2016, we expect lacklustre trading activities in the markets. Hence, we revised our FY15/FY16 earnings estimates by -0.4%/- 2.6%. All in, we downgrade to UNDER PERFORM on the stock with a lowered TP of RM7.60 (from RM8.00). This is based on 20x FY16 P/E.

Lowering 4Q15 revenue/earnings estimates by -1%/-1.7%. BURSA is poised to announce its 4Q15 financial results on 2 February 2016. Although in our last results note, we expect the company to book in declining earnings growth of -8% YoY, actual market statistics for Oct- Dec 2015 suggested more decline than previously estimated. We could potentially see further downside to our previous 4Q15 earnings estimates due to weak trading revenue from the securities market. We estimated that the securities segment is 2.9% below our original forecast. Actual average trading volume (Index & CPO Futures) were 1.4% lower than our original forecasts, driven by weak average trading volume from CPO Futures (3.7% lower from our earlier expectations but mitigated by stronger average trading volume of index futures at +30.6%. After reflecting these numbers into our model, we lowered our 4Q15 operating revenue and earnings estimates by 1.0% and 1.7% respectively to RM115.7m (-5.2% QoQ, -3.4% YoY) and RM47.9m (-7.0% QoQ, -9.9% YoY), respectively.

Outlook for 2016. No change to our view. Weak commodities prices, weak Ringgit, China’s economic slowdown and expectations of a gradual rise in US interest rate will continue to cast a long shadow over market sentiment. The current choppy market environment is likely to stay, driving investors to the sideline or exit. For the whole of 2015, foreign net selling of the local bourse reached more than RM19b, which seemed to continue with another RM1.8bn net selling in the first 12 trading days of 2016. To note, foreign net selling in 4Q15 was only at RM1.3b. Challenging external headwinds still linger and our strategist is now forecasting the local bourse to hit 1,755-points by end-2016, lower than what was initially projected, at 1,775-points, amid: (i) weak corporate earnings growth (4%-8% YoY for FY16-FY17) coupled with (ii) poor investment sentiment. In turn, we are projecting the average trading value and volume for the equity market in 2016 to be lacklustre at RM1.94bn (- 2.5% YoY, previous forecast: RM2.01bn or +3.0% YoY) and 1.98bn shares (+0.5% YoY, previous forecast: 2.3bn shares or +14.6% YoY), respectively. As for the derivatives market, we expect total volume for future contracts to improve by 1.2% YoY to 33.5bn contracts (previous forecast: 33.8bn contracts or -2.7% YoY).

Forecasts & Risks. After the abovementioned adjustments, we revised our FY15/FY16 estimates by -0.4%/-2.6% to RM193.6m/RM180.1m from RM194.4/RM185.2m. The key risks to our forecasts are: (i) lower-thanexpected trading volume in the securities and derivatives markets, (ii) deferment of IPOs in 2016, and (iii) higher-than-expected opex.

Valuation & recommendation. Following the downward revision in earnings, we reduce our TP to RM7.60 (from RM8.00), based on a revised FY16 P/E of 22.0x (-0.1 SD below its 5-year average P/E). This is also in line with the valuation multiples of its regional peers which are trading at a forward FY16 P/E of 18x. Hence, we downgrade our rating to UNDER PERFORM on the stock.

Source: Kenanga Research - 26 Jan 2016