1HFY23 core net profit of RM104.8m (-18% YoY) and 15.0 sen interim dividend declared were within expectations. We believe 2HFY23’s trading climate could be more vibrant as macro conditions improve with price weakness possibly indicating a more favourable risk-reward to investors. Cheaper stamp duties and possible fractional share trading may also widen participation. Maintain MARKET PERFORM and TP of RM6.25 as positives appear to be fairly priced in.

1HFY23 within expectations. Core net earnings of RM104.8m is within expectations, after accounting for a RM27.7m reversal from SST provisions for digital services from Jan 2020 to Mar 2022. This made up 47% of our full-year forecast and 46% of consensus full-year estimates. An interim dividend of 15.0 sen was declared, which we also deem to be within our full-year expectations of 29.0 sen (c.95% payout).

YoY, 1HFY23 operating revenue fell by 6% no thanks to lower trading revenues from the securities (-14%) and derivatives (-7%) markets. Period ADV came in at RM1.87b (1HFY22: RM2.53b) owing to overall less favourable market conditions. 2QFY23’s ADV of RM1.78b was also 17% softer as compared to 1QFY23 likely due to seasonal trading weakness. The group had reflected a reversal of SST provisions of RM27.7m during the period, which adjusting for it showed cost-to-income ratio to spike to 52.7% (+7.6ppt) from the group’s eroded earnings. All in, 1HFY23 core earnings registered at RM104.8m (-18%).

Working to stimulate tepid markets. We reckon that securities ADV may continue to be slow as participation did not pick up meaningfully despite: (i) a more stable domestic political landscape, (ii) better economic performance, and the (iii) reopening of China’s borders. That said, the traction from recent IPOs could continue to fuel retailers’ interest, with BURSA indicating a pipeline of 39 IPOs this year. Meanwhile, the group is working on new efforts to drive non-trading revenue such as the launch of the Bursa Gold Dinar and a new debt fund-raising platform with RAM. Its inaugural carbon credit auction in Mar 2023 could also serve as a platform for sustainable revenue in the near term. For now, our FY23F pre-tax profit falls within the group’s target of RM295m-RM326m.

In need of a better 2HFY23. 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 anticipate subsiding recessionary signals as well, on delivery of local economic readings which would drive corporate earnings in the coming quarters. Helping market participation could be the lowering of securities trading stamp duty charge to 0.10% from 0.15% at a maximum cap of RM1,000 per contract. The proposed fractionalisation of shares may also generate higher interest in the market. Encouragingly, we tracked the Jul 2023 ADV registering at c.RM1.92b.

Forecast. Post-results, we leave our FY23F/FY24F earnings unchanged. For the 2HFY23 period, we are hopeful for ADV to clock in at RM2.2b which translates to a full-year ADV of RM2.08b.

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 - 1 Aug 2023