FY22 net profit of RM226.6m missed our forecast by 6% on under-accounted marketing spend. Operating costs could be on the rise in FY23 as the group aims to expand its non-trading businesses while introducing new segments that only start contributing sustainably from FY24. We cut our FY23F earnings by 13% and lower our TP to RM6.25 (from RM6.60) on a rolled over FY24F valuation. Meanwhile, dividend expectations were met with a 11.5 sen final declared. Maintain MP.

FY22 missed our expectations, with a reported net profit of RM226.6m missing our forecast by 6%. However, this is in line with consensus estimate of RM227.6m (close to 100%). The negative deviation on our part was due to higher-than-expected marketing investments owing to new initiatives (i.e. Bursa RISE, Carbon Exchange). A final dividend of 11.5 sen was declared, totalling to 26.5 sen for FY22 (95% payout), close to our 27.0 sen expectation.

YoY, FY22 operating revenue fell by 22% mainly due to bogged down trading revenue from securities market (-41%). ADV closed at RM2,064m (FY21: RM3,562m), as peak sentiment from pandemic spurred trading cooled down and normalised. That said, the earlier-than-expected GE15 in 4QCY22 positively spurred trading activities. Meanwhile, derivatives trading (+11%) benefited from volatile commodity prices. Cost-to-income ratio rose to 48.5% (+10.9ppt) on the back of a lower top line in addition to lumpy market spend in 4QCY22. All in, FY22 net profit reported in at RM226.6m (-36%).

Priming up on additional income streams. As BURSA reverts to a normalised trading climate, the group seeks to ramp up its non-trading revenue by launching new products and services such as the Bursa Gold Dinar as well as the commercialisation of new debt fund raising with RAM, catering to SMEs. Capitalising on enterprise data solutions could also present growth opportunities for the group. To support these efforts, on top of skills acquisitions, a large capex budget of RM70m would be allocated mainly towards beefing up operating systems. Meanwhile, the group is upbeat that a strong pipeline of 39 IPOs could fuel interest in securities. Overall, the group opines that it could report a pre-tax profit of RM295m-RM326m in FY23. Against FY22’s RM310m, it is indicative that FY23 could be flattish in favour of longer-term sustainable earnings.

Forecast. Post results, we cut our FY23F earnings by 13% as we factor in higher operating costs to support BURSA’s new income streams. This results in our FY23F pre-tax profit of RM316m, which is within the group’s target. We also introduce our FY24F numbers, implying an 8% earnings growth. This is supported by progressive growth across its portfolios with some moderation in expenses from a capex heavy FY23.

In terms of ADV, we maintain our FY23F input of RM2,300m with FY24F at RM2,400m backed by higher participation.

Maintain MARKET PERFORM with a lower TP of RM6.25 (from RM6.60). We roll over our valuation base year to FY24F EPS of 31.2 sen against an unchanged 20.0x PER, in line with global exchange peers’ average. Due to a higher cost structure outlook, our applied EPS is lower than the FY23F EPS of 32.9 sen, previously. While the group is certainly making headway in broadening its portfolio, contributions from the new streams are expected to be modest with gradual gains with the bulk of BURSA’s performance still hinging on stock market activities. With that, risk-reward ratios appear fair for now but are supported by its solid ROE and stable dividend prospects. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us.

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 - 2 Feb 2023