We lower our TP to RM6.30 (from RM7.05) based on an unchanged 20.0x FY23E PER as we slash our average daily value (ADV) assumptions to RM2.00b/RM2.10b (from RM2.70b/RM2.60b) for FY22/FY23. This results in a -13%/-10% impact to our earnings expectations. We believe trading volumes will remain depressed as investors are sidelined by uninspiring global macros and softer sentiment. Positive catalysts may only materialise in the medium- term. Maintain MP.

From recent trading participation readings, 2QFY22 ADV looks to close at c.RM2.13b (1QFY22: RM2.60b; 2QFY21: RM3.75b). This is a far cry from our initial 2QFY22 target of RM2.5b where the softer trading sentiment is believed to be largely due to global conflict-stemmed concerns. During the 2QFY22 period, supply chains issues abound coupled with volatile commodity prices keeping inflationary pressures constant.

Softer activities likely to persist. We initially anticipated FY22E/FY23E ADV to clock in at RM2.70b/RM2.60b (vs. FY21: RM3.55b) but now opine that levels of RM2.00b/RM2.10b are more likely. Global macros remain unfavourable with recent US inflation rising to 9.1% as of June 2022, culminated by the abovementioned reasons. Locally, while we hope for sequentially better GDP numbers from our reopened economy, recessionary concerns may dissuade foreign participation. Additionally, retail investors may progressively retreat towards safer long-term investment and savings products as Bank Negara is expected to continue raising OPR (another two 25 bps hikes are expected). This only swells the risk-reward for margin trading unfavourably.

We continue to expect weakness in trading activities as the two previous years’ heyday of heavy trading of healthcare-related stocks are not likely to reoccur. That said, we believe that much needed positive catalysts could range from: (i) favourable resolution of the Russia-Ukraine conflict, albeit the sentimental boost may not be long lasting as the mending of economic damage would be a medium-term endeavour; (ii) earlier-than-expected General Elections (i.e. pre-2023); and (iii) sustained growth in commodity prices to support trading in the beneficiaries.

Post update, we cut our FY22E/FY23E earnings by 13%/10% from the abovementioned ADV reductions to RM2.00b/RM2.10b. This translates to 2HFY22 ADV to only average at RM1.7b which we do not believe as farfetched. That said, we estimate 2QFY22 to report net earnings of RM60m- RM65m (-30% YoY, -10% QoQ). Trading income makes up at least two thirds of BURSA’s total income and will likely remain as the lion’s share as its other income from listing and depository services also hinges on the overall sentiment of the equities market. BURSA’s upcoming earnings release is slated to be on 28 July 2022.

Maintain MARKET PERFORM with a lower TP of RM6.30 (from RM7.05). Our call is based on an unchanged 20.0x FY23E PER, in line with its global exchange peer average and pre-pandemic valuations, which is fairly valued at current levels. The group has been persistently vying for methods to improve efficiency which is testament to its leading ROEs. Additionally, though the group has been benefitting from equities rally in recent years, management has been proactively working towards developing other revenue streams to cement its long-term sustainability.

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

Source: Kenanga Research - 15 Jul 2022