We tone down our expectation for FY19 taking into account recent ADV figures. Local market was dragged by escalating US-China trade wars and fears of recession. Recent tabling of the Budget 2020 helped, but not enough to reinvigorate confidence against lingering pessimism which could spill over into FY20. This warrants us to cut our FY19E/FY20E earnings by 7%/13% to reflect our weaker expectations. Maintain MP but reduce TP to RM6.00 (from RM6.85).

2HFY19 likely to be limp. Recent extractions from Bloomberg indicated that 3QCY19 recorded securities average daily values (ADV) of RM1.84b. This is weaker than 1HFY19 ADV of RM2.04b; likely culprits that dampened trading appetite are: (i) earlier paring down contract values of various mega projects, (ii) ongoing disruptive trade wars, and (iii) local currency weakness. Although the recently tabled Budget 2020 was generally positive for the market, we reckon that it was not enough to propel 2HFY19 ADV close to the prior period. This is due to th

Brighter 2020? FY18 while not a good year in terms of market returns impacted by the 14th General Election, it was nonetheless better volume- wise compared to the current year that is still dealing with the tail-end effects of reduced trade volumes. Looking towards FY20, we are hopeful that there could be some improvement when the trade war progressively eases with some clarity on the table. However, local market could still be tepid on the back of sluggish Ringgit (Kenanga’s in-house estimates RM4.15-RM4.20/USD). Meanwhile, assuming our average Brent oil price expectations of USD65.00/barrel for FY19-FY20 hold, there could be little room for trading opportunities if current level persists (i.e. c.USD60.00/barrel). On the flipside, we believe that positive catalysts could come in the form of: (i) return of foreign investors, and (ii) the potential revival of infrastructure projects.

Post-model updates, we cut our FY19E/FY20E earnings by 7%/13% mainly from downside adjustments to our ADV expectations. We had previously anticipated 2HFY19 ADV to clock in at c.RM2.6b, but now skim it to c.RM1.9b which we think is a more realistic level. We also shave our FY20E ADV assumptions from RM2.3b-RM2.8b a quarter to a full-year average of c.RM2.0b, being a 5% YoY growth in line with our views above.

9MFY19 results preview. Following the adjustments above, we anticipate 9MFY19 to report earnings of RM133m-RM137m (-c.21% YoY, c.74% YTD). This implies 3QFY19 earnings of RM40m-RM44m (2QFY19: RM46.2m). To reiterate, weakness in earnings is likely to be caused by the passive trading environment. On another note, despite commendable efforts to trim fixed costs (i.e. staff, technology), we believe FY19E net margins (38.5%, -4.3ppt) might be overwhelmed by the dip in the top-line. As announced, the upcoming 3QFY19 results will be published by BURSA on 29 Oct 2019.

Maintain MARKET PERFORM but with a lower TP of RM6.00 (from RM6.85). While we leave our ascribed valuation of 25.0x FY20E PER unchanged (close to its current and 3-year forward average), our reduced TP comes from the lower earnings revision. While the immediate outlook could be dim, we opine that current trading levels could have well accounted for that. To balance the weakness in market activity, we believe investors could still lean on BURSA for fair dividend yield of c.4% from average payout of c.90%. Keeping with the trends in FY17 and FY18, we do not discount the possibility of special dividends to be paid this year.

Source: Kenanga Research - 18 Oct 2019