1H16 NP came in within expectations. As expected, an interim DPS of 17.0 sen was declared. Fluctuation in Ringgit, China’s economic slowdown, BREXIT as well as the expectations of a gradual rise in US interest rate will continue to cast a long shadow over market sentiment; hence, suppressing trading sentiment. Our FY16E/FY17E NPs have been tweaked by +2% following house-keeping purposes. Maintain MP with TP marginally increased to RM8.80 (from RM8.56).

Within expectations. BURSA reported 2Q16 net profit (NP) of RM49.5m (-1% QoQ; 0% YoY), bringing 1H16 NP to RM99.4m (+3%) which made up 53% and 48% of our and the consensus’ full-year estimates, respectively. As expected, an interim DPS of 17.0 sen (representing 92% of dividend payout ratio) was declared under the quarter reviewed.

YoY, 1H16 operating revenue increased by 3% with better performance in stable revenue (+6%) superseding the meagre growth in trading revenue (+2%, which was dragged by lower securities trading revenue amid lower average daily trading value and volume). Coupled with the decent growth in “other income” segment (+12%) which was predominantly driven by higher interest and dividend income (+13% and +38%, respectively), total income grew by 4%. On a closer look at the star performer- stable revenue, the decent performance was anchored by both: (i) higher growth from Bursa Suq Al-Sila (BSAS; +18%), on the back of higher adoption of the Murabaha concept as well as (ii) better listing and issuer services revenue (+5%) on higher initial and additional listing fees from the transfer of listing status and higher number of corporate exercises in 1H16. At the bottom line, even with a slight uptick in cost-to-income ratio (CIR) at 46.9% (vis-à-vis 1H15: 46.3%), the group’s net profit still grew by 3%, reflective of the underlying decent performance from the top line.

Meanwhile on QoQ basis, 2Q16 total income decreased by 3% with softer revenue seen in both Operating revenue (-3%) and Other income (- 4%). Looking at the lion’s share- operating revenue, weaker trading revenue (-1%) was recorded due to poor sentiment in the securities market amid domestic and global market uncertainties. This is despite the higher trading revenue from derivatives market, which increased by 5%. However, with normalisation of CIR from the high base in 1Q16’s CIR (expenses incurred for conferences and exhibitions), 2Q16 PATAMI only dropped by 1%.

Headwinds persist. Fluctuation in Ringgit, China’s economic slowdown, BREXIT as well as the expectations of a gradual rise in US interest rate will continue to cast a long shadow over market sentiment. Challenging external headwinds still linger and our strategist is now forecasting the local bourse to hit 1,715-point by end-2016, lower than what was initially projected at 1,725-points, amid: (i) modest corporate earnings growth (2%- 9% YoY for FY16-FY17) coupled with (ii) cautious investment sentiment. Meanwhile, we are keeping our conservative stance by forecasting average trading value and volume for the equity market in 2016 at RM1.86bn (-7% YoY) and 1.81bn shares (-8% YoY). As for the derivatives market, we expect total volume for future contracts to increase by 6% YoY.

Post earnings model update, our FY16E/FY17E NPs have been tweaked by +2% for house-keeping purposes. Post revision, our TP has been marginally increased to RM8.80 from RM8.56. This is still based on a targeted FY17E PER of 22.0x (at its 5-year average P/E). Maintain MARKET PERFORM.

Risks to our call include: Higher-than-expected trading volume in the securities and derivatives markets, Lower-than-expected opex, More IPOs.

Source: Kenanga Research - 26 Jul 2016