1HFY21 PAT of RM210.4m is deemed below our (55%), but within consensus’ (60%), expectation. Near-term earnings have peaked, but there is still value. Despite FY21-22E earnings reduction (5-10%), BURSA is traded at FY22E PER of 18.6x (28% discount to SGX) with YTD-21 ADV of c.RM4.4b in contrast to pre-COVID Fwd. PER of 21x (ADV of c.RM2.8b). In a bear case, we think the floor valuation is pegged at 17x PER (or RM6.95), -2.0SD from the mean. Dividend yield of c.5% is an additional safety net, while economic reopening serves as an immediate catalyst. Hence, despite lowering TP to RM8.20 @ FY22E PER of 20x (-1.0SD), we upgrade BURSA to OP.

Deemed below expectations. We deem 1HFY21 PAT of RM210.4m (+39% YoY) as below our (55%), but within consensus’ (60%), expectation, as we expect a weaker 2HFY21. Deviation is due to lower-than-expected Average Daily Trading Value (ADV) of RM3.8b in 2QFY21 (vs. our expected RM4.4b). 1HFY21 DPS of 24.0 sen is within expectation.

Results’ highlight. YoY, 1HFY21 PAT rose (+39%) mainly due to higher securities trading revenue (+41%) as ADV rose 41% to RM4.41b. This was further boosted by higher stable revenue (29%) from better: (i) listing & issuer services (+44%) on greater number of corporate exercises, and (ii) depository services (41%) – higher ROD (record of depository), share transfer, and account opening fees. Around 228k (+36.5%) new CDS accounts were opened in 1HFY21. QoQ, 2QFY21 PAT fell (-27%) as securities trading revenue declined (-24%) on lower ADV (-26%) of RM3.75b, exacerbated by higher cost to income ratio (+9.2 ppt).

Earnings have peaked but there is value. Average MTD (July) ADV has fallen 18% to RM3.09b and while we think earnings have peaked, we believe there is still value to be found. Structurally, with increasing digitalisation, we could be seeing a shift towards greater retail participation as evidenced in 1HFY21 with: (i) retail participation at 39% (vs. FY17-19 average of 23%), and (ii) retail ADV of RM1.74b (vs. FY17-19 average of RM512m). Although, political uncertainty is likely to keep foreign investors on the sidewalks, this may be offset by growing retail ADV.

Reduce FY21-22E earnings by 5-10% on lower FY21-22E ADV of RM3.77- 3.40b (vs.RM4.4-3.7b previously) and higher operating cost (+3%).

Appealing valuation with a safety net. Despite cutting our earnings forecasts, BURSA’s valuation (FY22E PER of 18.6x) trading at a 28% discount to its peer - SGX in Singapore, makes it appealing. This is especially so given SGX-listed stocks’ tendency to trade at a discount to stocks listed on Bursa Malaysia. The steep discount is more than enough to price in the political uncertainty and we think in a bear case, downside is limited with floor valuation of 17x PER or c.RM6.95 per share (-2.0SD from mean), implying ADV of c.RM2.5b. Note that pre-COVID, Bursa traded at Fwd. PER of c.21x with average ADV of c.RM2.8b. FY21-22E dividend yields of 5.4-5.0% also provide an additional safety net strengthened by an immediate catalyst in the form of an impending economic reopening. Upgrading BURSA to OUTPERFORM (from MP) albeit with a lower TP of RM8.20 (from RM8.80) based on FY22E PER of 20x (-1.0SD from mean), we recommend buying on weakness.

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

Source: Kenanga Research - 29 Jul 2021