9M18 results were below expectations as securities trading growth potential was softened by mellow global developments. The absence of dividends was anticipated. Our local bourse could still see weakness in the short-term amidst domestic reforms but could regain traction in the longer term once uncertainties subsided. Maintain MP but raise our TP to RM7.60 (from RM7.35) on a higher 25.0x FY19E PER, as the stock could be a safe-haven during weak market conditions.

9M18 missed. 9M18 PATAMI of RM172.2m (+3%) was below our/consensus full-year estimates, accounting for 69%/72% of respective expectations. The negative deviation was owing to overly bullish assumptions for 3Q18’s securities trading performance. We suspect trading value and volume growth rates were undermined during the quarter as unfavourable global economic developments (i.e. US-China Trade Tension) which slowed investors’ participation. Nonetheless, the absence of interim dividends was as expected.

YoY, 9M18 operating revenue extended by 3% to RM402.3m as stronger securities trading numbers (+7%; on 11% growth in SADV and 7% in volume) was negated by lower derivatives revenue (-5%). Other operating revenues remained flattish (<+1%) albeit with market data activities demonstrating a 5% growth. Overall, PATAMI registered at RM172.2m (+3%) with some improvement in the group’s cost-toincome ratio at 43.7% (-0.6ppt).

QoQ, 3Q18’s operating revenue decreased to RM123.2 (-8%), due to overall weakness across segments. Recall that 2Q18 hosted the GE14 which saw a more vibrant trading landscape while 3Q18 experienced a relatively softer global economic environment instigated by intensifying trade wars between US and China. PATAMI fell by 14% to RM50.2m owing to a higher cost-to-income ratio, possibly due to poorer operational synergies from weaker activities.

Volatility makes investors to stay away. While fourth quarter periods are seasonally more active in anticipation of window dressing, the current highly volatile landscape may result in investors to adopt more risk-adverse strategies. Domestic and foreign interests could be clouded by uncertainty of the coming Budget 2019 while the persistent external uncertainties, i.e. US and China Trade Tension & Fed's aggressive interest rate hike stance; will continue to put pressure on investment sentiment. However, in the long-term, the domestic equity scene could provide attractive investment opportunities for local and foreign investors, mainly thanks to the low beta nature. Our strategist also believes that downside could be limited in view of favourable seasonal patterns to come, further backed by stronger oil prices and greater institutional injection support in the near-term.

Post-results, we cut our FY18E/FY19E earnings by 8%/5% to tone down our trading activity assumptions in the coming periods (mainly from securities trading).

Maintain MARKET PERFORM but with a higher TP of RM7.60 (from RM7.35, previously). Our valuation is based on a 25.0x FY19E PER (from 23.0x FY19E PER, which is closely within the stock’s +0.5SD 3- year mean PER) on our lower core EPS of 30.3 sen. The higher end price multiple is because we anticipate that the stock could act as a safe-haven in the current weak market condition, hence the scarcity premium.

Risks to our call include: (i) lower-than-expected trading volume in the securities and derivatives markets, (ii) higher-than-expected opex, and (iii) less IPOs.

Source: Kenanga Research - 30 Oct 2018