We maintain our TP of RM6.25 and MP call. 2QCY23 average daily value (ADV) disappointed as sentiment was not met with favourable conditions once again. We anticipate downside pressures to be fairly limited going forward as macro outlook stabilises. At the meantime, BURSA continues to develop non trading revenue streams to diversify its operations. Adjusting for the lower 2QCY23 ADV with some spill over into 3QCY23 led to a 3% cut in our FY23F earnings.

2QCY23 ADV amounted to RM1.78b (-18% QoQ, -17% YoY), falling short of our anticipated RM2.1b for the period. We had expected seasonal softness as compared to 1QCY23 ADV of RM2.14b but market participation could have likely been undermined by as a result of lower overall confidence post-March 2023 global banking crisis keeping long-term investors highly cautious. Meanwhile, heightened US Fed rates could have further encouraged the exit of foreign shareholders while the weakening ringgit was unsupportive of domestic appetite.

Brighter sparks in 2HCY23. With the gradual improvement of macro factors (including the stabilisation of interest rates with a 3% OPR expectation), we anticipate progressive improvement of market sentiment as well as trading activities. We also envisage subsiding recessionary signals as well, on delivery of local economic readings which would drive corporate earnings in the coming quarters. That said, given the higher base seen in CY22, a comparative easing should be expected (in-house CY23 GDP target at 4.7% vs. CY22 GDP of 8.7%). Meanwhile, favourable state elections could also be a booster to market activities. 

We revise our CY23F ADV to RM2.08b (+1% YoY), from RM2.21b. Following our adjustments for the disappointing 2QCY23, we also lower our 3QCY23 target to RM2.0b (from RM2.2b) as trading softness may still prevail. However, this may be offset by the government’s recent reduction in stamp duty to 0.10% (from 0.15%, capped at RM1,000 per contract) which could incentivise higher retail participation. Our 4QCY23 ADV target of RM2.4b remains unchanged, reflecting more meaningful diversion of headwinds.

Forecast. Post update, we lowered our FY23F earnings by 3% due to the abovementioned softer ADV inputs. Our updated pre-tax earnings forecast remains within the group’s FY23 target of RM295m-RM326m.

Trading activities aside, BURSA’s performance could be supported by higher service fees from a stronger IPO pipeline for the year (up to 39 IPOs targeted from FY22 of 35 new listings). Meanwhile, new initiatives (recently launched carbon credit auction and upcoming debt fundraising platform, Bursa Gold Dinar) may be revenue accretive. With this, we expect its 2QFY23 reported earnings to register between RM50m and RM55m.

Maintain MARKET PERFORM and TP of RM6.25. Our TP is based on an unchanged 20.0x FY24F PER, in line with its global financial exchange peers’ average, and pre-pandemic valuations. Risk-reward ratios appear fair with the lack of strong medium-term catalysts to deliver earnings surprises cushioned by its solid ROE and stable dividend prospects. There is no adjustment to our TP based on ESG 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 - 18 Jul 2023