1QFY20 PATAMI of RM64.7m (+38%) came above estimates, arising from stronger-than-expected derivatives and operating revenue streams while the absence of dividends was expected. BURSA will continue to benefit from stronger trading appetite of market participants despite the economic uncertainties which could stabilise in 2H20, in our view. Maintain OP but raise TP to RM7.25 (from RM6.50) as we raise our earnings assumptions by 14%/9% for FY20/FY21 and roll forward our valuation base-year.

1QFY20 above expectations. 1QFY20 PATAMI of RM64.7m came in above our/consensus expectations, making up 31%/33% of respective full year estimates. While we had previewed for 1QFY20 earnings to come in close to RM51.0m, the positive deviation came from better-than expected derivative and other operating services income. No dividend was announced this quarter which are usually declared semi-annually.

YoY, 3MFY20 operating revenue rose by 39% thanks to surge in securities (+32%) and derivatives (+64%) trading. Securities ADV improved by 22% while volume increased by 24%, as the year started with significantly higher volatility spurred by a rise in CPO prices, Covid-19 pandemic and plunge in crude oil prices. Prior to this in 3MFY19, market participants were also more passive burdened by then on-going trade war. Cost-to-oncome ratio improved to 42.1% (-6.9ppt) as operating costs remained relatively stable despite the strong top-line performance. 3MFY20 PATAMI registered at RM64.7m (+38%).

QoQ, 1QFY20 operating revenue grew by 31% similarly on the back of stronger trading activities spurred by the abovementioned. Notably, other operating expenses would have been flattish (save for 4QFY19’s RM3.3m impairment on software). With this, 1QFY20 earnings came in 42% higher.

Revived by volatility. Post-2019 lull, we anticipate high levels of volatility to persist as investors seek comfort in counters which are the least scathed by the Covid-19 pandemic and falling commodity prices. Retailers also took bets in the heightened activity, with rebounds from low bases appearing to be a favourite theme. Globally, multinationals have begun guiding earnings weakness which could leave investors jittery, with the spill-over effects yet to be fully felt in the indices. That said, the heightened trading activity will continue to boost BURSA’s top-line at this juncture. Meanwhile, upcoming initiatives are in the pipe-line to develop more information-based products for diversification when trading volatility eases, which we anticipate could be seen in 2HFY20 and FY21. For now, YTD-30 Apr 2020 ADV stood at RM2.54b (vs. YTD-30 Apr 2019 of c.RM2.09b).

Post-results, we raise our FY20E/FY21E earnings by 14%/9% on more bullish assumptions in derivatives trading and other operating income, which we hope to see more of in the later part of FY20. Keeping with similar payout ratio (c.95%), we are hopeful that dividend payments could amount to 28.2 sen/27.5 sen (from 24.7 sen/25.3 sen).

Maintain OUTPERFORM with a higher TP of RM7.25. In addition to our revised earnings, we have also roll over our valuation base-year to FY21 on an unchanged 25.0x Fwd. PER valuation. Given the turbulent market conditions, investors may look to BURSA as a safe-haven which also offers attractive dividend prospects (4.6-4.7% yields). We also do not discount the possibility of special dividends which the group tends to declare during the year-end (save for FY19 when the trading landscape was much more passive).

Source: Kenanga Research - 4 May 2020