Review

• Results were in line with expectations as FY16 total revenue and PBT accounted for 96% and 99% of our full year estimates.

• The board is recommending final dividend of 17.0 sen per share. In addition to an interim dividend of 17.0 sen paid earlier, total dividends for FY16 will add up to 34.0 sen – slightly lower than 34.5 sen declared in FY15. Total DPS for the year translates to a dividend payout and yield of 94% and 3.9%.

• FY16 net profit contracted by 2.5% YoY to RM193.6mn. PBT slipped by 1.8% YoY on the back of a 2.3% decline in revenue. Other income, which comprises interest income from investments and dividend income, surged by 10.5% while operating revenue decreased by some 3.1% YoY. Total operating expenses were kept lean with staff cost easing by some 4% YoY. ROE stood at 23% (FY15: 26%).

• Sequentially, net profit rebounded to accelerate by 13.9% QoQ – after easing for three straight quarters. The improvement was mostly underpinned by stronger revenue (+3.6% QoQ) along with sharply lower staff cost (-11.5% QoQ).

• Compared to 2015, operating revenue softened on the back of an 8.6% YoY decline in securities trading revenue and 2.1% contraction in BSAS trading revenue. Bursa noted that securities trading revenue deceased on the back of weak market conditions and investor sentiments, thus leading to lower trades registered. Meanwhile, derivatives trading revenue increased by 3% contributed by higher trading fees, guarantee fees and collateral management fees earned. All other revenue streams also registered growths. We note higher: 1) market data revenue (+4.8% YoY) due to higher number of subscribers for derivatives market data, along with 2) listing and issuer services (+1.2% YoY) due to higher number of corporate exercises.

• Securities trading revenue made up ~45% of total operating revenue. Trading participation by foreign institutions stood at 27% in 2016 (2015: 27%). Comparing between trading participation by retailers and institutions, retail investors made up only 21% of total trading participation vs. 23% in 2015. Average daily value (ADV) dipped to RM1,812mn vs. RM1,991mn in 2015. Along with that, market capitalisation eased to RM1,667bn from RM1,695bn a year ago while trading velocity slipped to 27% (2015: 30%).

• The improvement in derivatives trading revenue was due to the higher number of average daily contracts (ADC) for the crude palm oil futures. Trading of the FBMKLCI Futures however, eased as ADC decreased to 11.2k vs. 12.3k a year ago. While the trading velocity for crude palm oil futures climbed to 22.1% (2015: 21.5%), the trading velocity for FBMKLCI Futures fell to 9.4% (2015: 15.1%). Combined, ADC traded grew to 57.8k contracts compared to 57.2k in 2015. Of this, 80% of total trades were in crude palm oil futures and 19% in FBMKLCI futures. By participation, foreign institutions traded 64% and 34% of the FLKI and FCPO.

• On the Islamic market trading activity front, the Bursa Suq Al-Sila’ (BSAS) trading revenue accounted for 3.5% of total operating revenue. While we note the slight 2.1% YoY dip in the BSAS trading revenue, ADV advanced on the back of an increase in the number of trading participants from 109 in 2015 to 124. The number of sukuk listed stood little changed at 23 (2015: 22) while the market capitalization of Shari’ah compliant stocks declined to RM1,031mn (2015: RM1,086mn).

Impact

• Adjusting for the FY16 results, we tweaked our FY17 and FY18 net profit forecast lower to RM195.3mn and RM205.1mn from RM223.4mn and RM246.5mn. We forecast better profit growth of 6.4% to RM218.3mn in FY19, underpinned by expectations of recoveries in market sentiments and pickup in capital market activities. We expect corporate exercises and trades to remain tepid in 2017 as global uncertainties weigh on domestic activities.

Outlook

• We do not foresee a strong inflow of foreign funds in 2017. Management also foresees a challenging year ahead for the equities market. In 2016, we note heavy foreign fund outflows in: 1) May due to MSCI reducing the weightage for Malaysian stocks, and 2) November, post the US presidential election. Total net foreign outflow in 2016 amounted to RM3.2bn. This is the third year of consecutive outflow for the country. We continue to foresee softer trading activities for the remaining part of the year as sentiments remain depressed by broad macro uncertainties.

• The volatility in commodity prices and the FBM KLCI should continue to help spur activities in the derivatives market. On the Islamic capital front, Bursa noted that transactions on Bursa Suq Al-Sila’ could see some boost from the introduction of a fully integrated Islamic securities exchange platform. Bursa Malaysia-i, the world’s first fully integrated Islamic securities exchanged platform was launched in September 2016. According to Bursa, this platform is expected to help attract a wider pool of both domestic and foreign investors.

Valuation

• We lower Bursa’s TP to RM8.50 on the back of the downward revision to our earnings estimate. The TP is based on an implied FY17 PER of 20x. Our assumption is based on the group’s 3-year average payout in excess of 90% and decent dividend yields of around 4% (excluding special dividends). Nevertheless, due to the potential downside to our revised TP, we downgrade BURSA from hold to SELL.

• Key potential upside risks to our TP include: (1) a compression in risk premiums, (2) further pick-up in velocity, (3) improvement in retail sentiments, and (4) return of foreign investors in full swing.

Source: TA Research - 6 Feb 2017