Potentially Softer Upcoming 4Q23 Performance

To recap, Bursa reported a 20.5% YoY increase in 3Q23 net profit. 9M23 net profit grew from RM177.6mn to RM192.8mn, representing 75% of our full-year estimates. Looking ahead to the fourth quarter results, we anticipate Bursa to deliver a predominantly stable sequential performance. However, there is a potential downside risk to our full-year forecast, stemming from the absence of a notable acceleration in trading activities during the 4Q and the possibility of softer-than-expected contributions from the non-trading revenue segment.

We anticipate that the overall trading revenue should remain stable QoQ. This expectation is anchored in the assumption that total Average Daily Volume and trading velocity would stay relatively steady. That said, we predict that trading velocity will remain unchanged at around 30% in the 4Q. Elsewhere, we note that Bursa recorded a modest net outflow in foreign funds during the fourth quarter, following a net inflow of RM2.2bn in the third quarter. To recap, the YTD total net foreign outflows amounted to RM2.0bn in 9M23, compared to a total net foreign inflow of RM4.4bn in 2022.

On the derivatives market, while we foresee an ongoing challenge in the overall Average Daily Contracts (ADC) due to the subdued volatility of Crude Palm Oil (CPO) prices and the FBM KLCI on a YoY basis, we maintain an optimistic outlook. This optimism stems from the introduction of T+1 After-Hours Trading, which we believe will further contribute to an elevation in overall trading activities within the derivatives segment. Notably, the T+1 After-Hours Trading ADC demonstrated an 8.2% YoY increase in the first 9M of 2023, constituting 10.8% of the total ADC—up from 9.4% in the same period of 2022.

Meanwhile, the capital market activities demonstrated improvement, as reported in the recent 9M23 results, with total funds raised experiencing a modest uptick to RM8.1bn (compared to RM7.2bn in 9M22). Despite this positive trend, the addition of only seven new listings in 4Q is expected to result in a total of 32 listings for the year, falling short of the management's targeted 39 IPOs and below the 35 new IPO listings recorded in 2022.

Nevertheless, while this may pose a potential challenge to Listing & Issuer Services fees, which had witnessed an 8.3% YoY decline in 9M23, we anticipate compensatory growth from various non-trading revenue segments. These segments include Depository Services, Data Business, Member Services & Connectivity, and income derived from conferences and exhibitions.

A More Vibrant 2024 Envisaged

We foresee a more vibrant 2024 as Bursa Malaysia strategically unveils several innovative investment assets and tools to broaden investor engagement and mitigate the decline in operating income. The launch of the Bursa Gold Dinar app, focusing on gold as an investment asset, holds promise for generating new revenue streams and diversifying Bursa's offerings. Additionally, Bursa is actively moving forward with the launch of an innovative currency futures product.

Our optimism is further buoyed by the Bursa Carbon Exchange, introduced in September 2023, which has initiated trading in carbon credits. The forthcoming inclusion of Renewable Energy Certificates (RECs) by 3Q24 adds another layer of potential growth. Beyond facilitating companies in attaining net-zero targets through the trading of carbon credits and RECs, we perceive this initiative as a catalyst capable of bolstering foreign participation in the market. This strategic move not only aligns with evolving sustainability trends but also positions Bursa Malaysia as a key player in fostering environmentally conscious investment opportunities.

Efforts to Raise Retail Participation

The Retail Average Daily Value (ADV), which experienced a surge in 2020 and 2021, has gradually declined, reaching RM550mn in 2022 and RM562mn in 9M23. As the second-largest contributor, accounting for some 28% of the overall ADV, we believe that there is a pressing need to heighten efforts aimed at bolstering retail investor participation.

To address this, Bursa has taken a proactive approach with the recent introduction of the new Customer Portal, MyBURSA. This platform serves as a direct link connecting investors with dealer representatives, providing an avenue for representatives to showcase their expertise by sharing their portfolios. The anticipated rollout of MyBURSA to the retail segment in the near future is expected to enhance retail investors' engagement. Through MyBURSA, investors can select and directly engage with Dealer Representatives, thereby fostering a more personalised and supportive approach to address their specific investing needs. We believe this initiative reflects a strategic move by Bursa to empower and encourage greater retail participation in the market.

Earnings Impact

We are maintaining our current FY23 earnings estimates while awaiting the impending release of Bursa's 4Q23 results. The 9M23 performance indicates that Bursa is progressing in line with its PBT target range of RM295mn to RM326mn. Furthermore, the non-trading revenue is showing signs of strengthening, with a projected YoY growth of 5-7% as guided in 2023. That said, we believe that Bursa is well-positioned to sustain its appealing dividend payout, exceeding 90% in FY23.

Valuation and Recommendation

Updating beta assumptions based on the latest data from Bloomberg, we raise Bursa's target price to RM8.10 from RM7.30, based on an implied FY24 PER of around 24.7x. We reiterate our BUY recommendation on Bursa. We note that Bursa is trading within the average regional peers PER of 22x (SGX: 20x, HKEx: 23x, ASX: 26x).

Other key upside risks to our TP include 1) a compression in risk premiums, 2) a pick-up in velocity, 3) a stronger-than-expected improvement in the derivatives market, 4) further improvement in retail sentiments, and 5) the ability to sustain foreign inflows.

Source: TA Research - 24 Jan 2024