Impressive ambitions to increase brokerage revenue

Apex is setting ambitious goals to diversify and significantly improve its brokerage income streams. Currently, the retail segment dominates the brokerage income, accounting for 90%. To achieve a more balanced income mix, Apex aims to expand its institutional offerings, targeting a 50% contribution from both retail and institutional sales.

Key strategies include leveraging the extensive network of the Group Executive Chairman, YBhg. Datuk Wira Farhash Wafa Salvador J.P., and Group Executive Director, Dato' Zakaria Bin Arshad, to effectively penetrate the institutional client base. Apex is also bolstering its institutional sales teams and reinforcing support for the research department. While recognising the competitive nature and narrower margins in the institutional segment, management is optimistic about the potential for increased trading volumes in this sector.

Given the fierce competition the retail segment faces from new online trading platforms like Moomoo and Rakuten Trade, the decision to bolster its presence in the institutional segment is strategic. These platforms offer low to no brokerage fees, require no deposits, and provide incentives such as free fractional shares to attract new users. Despite this, Apex remains committed to maintaining and growing its strong retail base.

To achieve this, Apex plans to enhance its remisier network, currently at 80, and target high-net-worth (HNW) individuals. Efforts will also focus on lowering the age profile of remisiers. Incentives for remisiers include competitive commissions and attractive prizes to foster healthy competition. Additionally, Apex aims to expand its branch network beyond the current six branches, to various other strategic locations across the country, such as Melaka, Johor Bahru, Penang, Klang Valley, the East Coast, Sabah, and Sarawak.

Update on Partnership With Yuanta Securities

The collaboration with Yuanta Securities (HK), announced in March 2024, is not expected to have a significant impact on the group's operations presently. Management has indicated that the collaboration primarily involves mutual client onboarding and research support. However, the partnership is viewed positively as it could enable Apex to leverage Yuanta's extensive regional expertise, in the future. This positions Apex to explore growth opportunities and foster collaboration not only in Malaysia but also across other ASEAN countries. Potential benefits include cross-market opportunities for market access, marketing initiatives, and expanded service offerings, which could lead to new revenue streams and an expanded clientele base for Apex. To recap, Yuanta Securities operates across Greater China, northeast Asia, and ASEAN markets, providing a solid foundation for potential synergies. In the meantime, Apex is actively pursuing partnerships to enhance its product offerings, including derivatives, as part of its business growth strategy.

Promising Growth in the Money Lending Segment

The growth in the money lending segment has shown promising results since its reactivation in the third quarter of 2022. In 1Q 2024, the segment reported robust YoY revenue and PBT growth rates of 25.1% and 83.0% to RM2.02mn and RM1.6mn, respectively. According to management, these loans, targeting corporate clients and capital market players, typically exceed RM1.0mn and have a 2–3 years duration. All loans are secured. The segment's attractiveness is underscored by competitive rates, averaging around 10.5%. Management intends to sustain the momentum for growing this segment.

Currently, total outstanding loans stand at around RM98.8mn, with the top five loans averaging approximately RM14.0mn, backed by security averaging RM17.0mn. Addressing concerns raised by external auditor Crowe Malaysia PLT regarding a significant RM23.8mn loan, management clarified that the loan remains current with a strong historical payment record. They believe no provision is necessary, given the loan's secured status with collateral valued at RM29.5mn. Management maintains confidence in the loan's asset quality despite noting impairment risks.

Potential Downside Risk to Earnings

Despite management's aggressive strategy to expand the stockbroking business, including strengthening institutional sales and establishing a corporate finance division to enhance ancillary services, there are potential financial implications to consider. We believe that these initiatives are expected to incur higher overhead expenses, particularly in IT modernisation for advanced systems supporting multiple platform tools, customer e-boarding, and transitioning to paperless operations. Consequently, we anticipate an increase in personnel costs.

Apex's aggressive growth strategy may lead to a drawdown on the group's cash and bank balances, which have decreased from RM104mn to RM47mn since FY22. Management indicated the potential to increase borrowings to achieve a comfortable gearing level of 0.3x. Meanwhile, RM55mn from the sale of Menara Apex could help fuel growth initiatives. The group also still holds three land assets valued at RM80-90mn, though they are not currently scheduled for sale. Nevertheless, the group's current expansion phase suggests that implementing a dividend policy is unlikely in the near term.

Financial Impact

We make no changes to our earnings estimates for now, pending the release of the upcoming 2Q 2024 results.

Valuation

We have shifted our valuation methodology for Apex from PBV to PER, reflecting the anticipated increase in the group's earnings potential. Tagging a 30% discount to the sector's average P/E ratio of 22x, we raise Apex's TP to RM1.35 from RM1.19. With that, we have upgraded the stock from sell to BUY, given the broader risk-reward potential.

Source: TA Research - 23 Jul 2024