Anticipating Marginally Stronger Brokerage

We expect a slight uptick in Apex Equity’s (AEHB) sequential brokerage income for the upcoming 3Q results, driven by the anticipation of increased trading activities during the quarter. Additionally, we estimate that the trading velocity of securities on the stock exchange has risen to approximately 28%, up from 26% in the 2Q. We believe that sentiments improved in 3Q attributed to a more favourable political environment, as voters opted for political stability in the recent state elections.

To recap, AEHB's brokerage income has been lacklustre in the past several quarters, mainly due to reduced trading volumes resulting from the overall weak market conditions. As reported by Bursa Malaysia, the Total Average Daily Value (ADV) traded decreased to RM1,964mn compared to RM2,369mn a year ago. Furthermore, the trading velocity declined sequentially from 31% in 1Q23 to 26% in 2Q23. Concurrently, there was a notable shift in total net foreign capital flows, with RM4.2bn in net outflows in 1H23, reversing the RM4.4bn in net foreign inflows seen in 2022.

We also predict that the improved market sentiment and increased trading activities will spur margin interest income. We note that this segment of AEHB’s stock and securities broking business has been improving, rising by 24.6% YoY in 1H23.

Promising Outlook for Money Lending Operations

We foresee a favourable earnings outlook with the revival of money lending operations in 3Q22. This segment has contributed healthily to the company's financial performance, generating revenues of RM3.4mn and a PBT of RM1.9mn in the most recent 1H23 results. Nonetheless, we note that this segment still represents a relatively small portion of the company's overall business, accounting for approximately 16% of total revenue.

We foresee substantial growth opportunities in the lending business due to increasing demand and a rising interest rate environment. While the group currently relies on its financial strength as a source of funding, we also anticipate a potential expansion in AEHB's borrowings to meet the growing demand for credit.

As of June 30, 2023, AEHB maintains net cash and bank balances, including short-term funds, totalling RM66.5mn, a decrease from RM104.0mn in December 2022. Additionally, AEHB has total bank borrowings amounting to around RM5.0mn.

Outlook and Prospects

We make no change to our forecasts at this juncture. We continue to envisage modest earnings growth for AEHB in FY23, primarily supported by a more stable securities market. We believe that ongoing efforts by Bursa to fortify the trading ecosystem, enhance market vitality, and attract greater foreign participation will contribute to an upswing in trading activities and market volumes.

The recent reduction in the stamp duty rate for shares traded on Bursa Malaysia, which has been lowered from 0.15% to 0.1% of the contract value (with a maximum cap of RM1,000 per contract) and came into effect in July 2023, is seen as a positive move. It is expected to stimulate the market and make it more appealing to investors.

Additionally, Bursa's confirmation that the Sales and Services Tax (SST) exemption on brokerage fees will persist for the trading of shares listed on Bursa Malaysia is another encouraging factor for trading activities. This exemption will continue to support trading, which has been grappling with diminished investor confidence and reduced trading volumes. Hence, we maintain our assumption that the trading velocity in the Securities Market will remain stable at 28% from FY23 to FY25.

Valuation and Recommendation

Tagging a P/B ratio of 0.7x, based on the peer’s average, to FY24e BV, we maintain AEHB’s TP at RM1.19. We upgrade the stock from sell to HOLD in light of the expanded risk-reward potential resulting from the recent decline in the share price.

Source: TA Research - 24 Oct 2023