Accounting for more active market activity amidst ongoing volatility brought upon by Covid-19 and recent oil price plunge, we raise our FY20E/FY21E earnings for BURSA by 8%/8%. With that, we anticipate 1QFY20 earnings to come in close to RM51.0m (+9% YoY). As investors could be fidgety with the upcoming quarterly earnings reporting season, stability may only be seen in end-FY20 or even early FY21. We maintain our OP call and TP of RM6.50 on more conservative valuations.

Trading volume boosted by volatility. After a sluggish 2019, market sentiment in 2020 has experienced constant swings which started with a boost from strong CPO prices early this year to the current Covid-19 pandemic and its backlash to economic activity. The recent plunge in crude oil prices is also of no help to investors’ confidence. Regardless, the greater volatility resulted in greater trading volumes to the benefit of BURSA. From our Bloomberg extractions, 1QFY20 average daily values (ADV) stood at RM2.53b (+22% YoY, +41% QoQ), beating our anticipated RM2.14b for the period. Month-to-date April ADV stood at RM2.56b (+24% YoY).

Stimuli and projections. To ease the fall-outs from Covid-19, the government has introduced fiscal injections of RM260.0b (of which RM35.0b is direct funding) with SMEs and the low-to-middle income group in mind. While these measures are intended to alleviate short-term financial woes as the nation strives to curb the pandemic, there will be much to ponder on the longer-term sustainability of the national economy, as businesses may not recoup from the lost time or opportunities upon resumption. Though coming quarters of corporate earnings could be threatened by this, investors will continue to place their bets and funds on stocks with solid business efficiency and resilience to counter challenges which could be even more pronounced later in the year.

We raise our earnings assumptions by 8%/8%, mainly on the back of greater ADV assumptions. We raise FY20E full-year ADV to RM2.42b, from RM2.01b previously. While we believe that trading activity could ease in 2HFY20 with expectation that the global landscape stabilises and Covid-19 becomes contained, investors could still be cautious with corporate earnings deliverables, hence keeping the trading environment somewhat volatile. We opine that confidence could regain some footing in FY21 and expect an ADV of c.RM2.48b (+3%). With the higher earnings, we raise our dividend expectations to 24.7 sen/25.3 sen from 23.0 sen/23.0 sen on the same c.95% payout assumption.

Given the above, we anticipate 1QFY20 to record earnings close to RM51.0m (+9% YoY). In addition to more robust securities trading activity to drive revenue, the group should see leaner operating costs following its organisational restructuring exercise announced in Nov 2019. Additionally, management is also committed to trim other expenses where necessary. We do not expect any dividends this time around, as the group usually pays them semi-annually. Results are expected to be released on 30 April.

Maintain OUTPERFORM and unchanged TP of RM6.50. Though we raised our earnings assumptions, we also lower our applied valuation to 25.0x FY20E PER (from 27.0x, in line with the stock’s 5-year Fwd. mean) in line with the higher market volatility and uncertainty. We feel that the unchanged TP further enforces our call as BURSA continues to demonstrate value in spite of adverse market swings. Current price points and higher earnings projections also brings dividend yield potential to a more desirable 4.3-4.4%.

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

Source: Kenanga Research - 23 Apr 2020