1Q19 PATAMI of RM46.9m came below estimate, dampened by slower trading activities, global uncertainties (the US-China trade wars and selective banning of palm oil in the EU) as well as weaker investment sentiment. Amidst those negative factors, stable crude oil prices and higher local participation are expected to boost trading activities going forward. Maintain MP with a lower TP of RM6.85 (from RM7.60) as we cut earnings on conservative trading statistics.

1Q19 below. 1Q19 PATAMI of RM46.9m came below our/consensus expectations, making up 19%/21% of respective full-year estimates. The deviation was mainly due to the lacklustre trading environment since the beginning of the year which dragged overall trading volume and values. No dividend was declared, as expected.

YoY, 3M19 operating revenue dipped to RM121.4m (-16%) from more passive trading in securities (-23%, -24% drop in SADV and -17% decline in volume) and derivatives market (-14%). Other operating revenue fell by 7% mainly from lower listing and issuer service fees. As the lower revenue added pressure to the cost-to-income ratio (49%, +7.3ppt), PATAMI registered at RM46.9m (-27%) on stable effective tax exposure.

QoQ, 1Q19 operating revenue declined slightly by 2% as lower derivatives trading revenue was offset by better other operating income streams. Securities trading improved by 2% on 8% growth in SADV being brought down by a marginal 1% increase in volume. Driven by a 16% increase in staff cost, 1Q19 cost-to-income ratio expanded by 4.7ppt, translating to a 10% decline in 1Q19 PATAMI.

Mood swings. Weakness in overall market sentiment appears to persist arising from the prolonged uncertainties in the macrolandscape, with the ongoing US-China trade wars as well as the European Union’s selective banning of palm oil in European bio-diesels dragging risk-to-reward ratios. A total foreign outflow of RM1.36b at YTD-Mar 2019 is also a telling sign of the softer confidence in the local market. Still, we are optimistic for a better 2H19 with our strategist’s view that weaknesses in sentiment could be nearing its end. This is premised on the potential bottoming of local benchmark indices, which could be showing signs of a rebound (refer to our 2nd April 2019

Investment Strategy Report: Thinking the Impossible), potentially backed by healthy and sustainable oil prices. On another note, the introduction of the T+2 settlement’s cycle for the securities markets could lead to a rise in transaction volumes and hence trading participation.

Post-results, we cut our FY19E/FY20E NP by 17%/12%, led by lower trading volume and value assumptions in a more conservative trading environment.

Maintain MARKET PERFORM with a lower TP of RM6.85 (from RM7.60, previously). We roll over our valuation base year to FY20E, against an unchanged 25.0x Fwd. PER, which is in line with the stock’s 3-year mean. While there is a lack of clear catalyst to drive a re-rating of the equity market currently, the stock could act as a solid proxy to the progressive growth in our economy over the long term.

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

Source: Kenanga Research - 30 Apr 2019