Investment Highlights

• We maintain HOLD on Bursa Malaysia (Bursa) with an unchanged fair value of RM6.80/share, pegging the stock to FY24F PE of 22x. Our FV reflects a neutral 3-star ESG rating.

• Bursa’s 12M23 normalised earnings of RM223mil, excluding the one-off reversal of SST provisions of RM31.8mil (RM27.7mil on digital services in 2Q23 and RM4.1mil on BSAS in 4Q23) coupled with the recognition of deferred tax assets from unutilised capital allowances brought forward from previous years which lowered tax expenses by RM5.6mil, were within expectations, coming in 5% below our and consensus estimates.

• We make no changes to our FY24F earnings but fine-tuned our FY25F net profit estimate by -3.8% after raising our DATV assumption for securities market slightly and increased estimates for operating expenses.

• 12M23 core earnings were subdued with a slight decline of 1.7% YoY on the back of a decrease in trading revenue (-1% YoY) despite recording a higher non-trading revenue of 5.4% YoY. The modest improvement in securities/BSAS trading revenue of +1.2%/+3.9% YoY were dampened by lower derivative trading revenue (-7.8% YoY).

• On QoQ basis, underlying earnings of RM54mil in 4Q23 declined by 10.7% after stripping out a one-off tax expense adjustment from deferred tax asset which lowered its tax rate to 18.1% vs. 24.6% in the preceding quarter. PBT fell by 10.4%, attributed to lower securities and derivatives trading revenue coupled with increased operating expenses.

• In 4Q23, DATV of on-market transactions for equities increased marginally to RM2.16bil vs. RM2.13bil in 3Q23. This led to a flattish YoY DATV of RM2.1bil for 12M23, which was in line with our estimate for FY23.

• Velocity of the securities market was slightly lower at 29% in 12M23 vs. 30% in 12M22.

• In 12M23, foreign ADV traded rose 8.2% YoY to RM607mil. The mix in value of shares traded by foreign investors climbed to 30% in 12M23 (12M22: 27%) while the proportion in value of trades by domestic investors slipped to 70% in 12M23 vs. 73% in 12M22.

• 4Q23 saw foreign fund outflows from the securities market of RM377mil cumulatively vs. an inflow of RM2.2bil in 3Q23. This led to a cumulative net foreign fund outflows of RM2.3bil in FY23 vs. inflows of RM4.4mil in FY22. Yearto-date (up until 29 Jan 2024), cumulative foreign fund inflows amounted to RM537mil.

• Financial markets are likely to continue to be volatile, contributed by noises on the direction of US interest rates, ongoing geopolitical tensions and pace of China’s recovery. We raise our DATV assumptions slightly to RM2.4bil/RM2.5bil from RM2.2bil/RM2.4bil for FY24F/25F post-results announcement. YTD (2-30 Jan 2024) DATV for the securities market was RM3.2bil. However, we do not expect it to be sustained at this level. From the Fed fund futures perspective, the market appears to have priced in 6-7 interest rate cuts in US. This expectation by the market is likely to be disappointed given the continued robust economic and employment data, with US Fed recently indicating of no intentions to cut interest rates in a hurry. Hence, the mantra of higher-for-longer interest rate will still be relevant, and this should see a strong USD sustaining with market sentiment turning cautious again.

• For derivatives trading, average total contracts traded fell by 7.3% YoY to 72,896 in 12M23, attributed to lower volatilities for FCPO and FKLI. In 12M23, the average daily contracts (ADC) traded for FCPO slid by 8.9% YoY to 60,735 while ADC for FKLI rose marginally by 1.9% YoY to 11,944.

• Operating revenue of Bursa grew modestly by 1.3% YoY to RM593mil. The exchange reported a cost-to-income (CI) ratio of 47.8% in 12M23. With the innovative/sustainability products/services (renewable energy certificates and centralised sustainability intelligence (CSI) platform) targeted to be launched in 2024, staff cost is anticipated to rise further with the hiring of additional headcounts. To support new businesses, Bursa Carbon Exchange (BCX), Gold Dinar (BGD) and Term Capital (BR Capital), the number of employees have risen to 639 in FY23 from 608 in FY22. With these businesses, Bursa enhances its position as a multi-asset exchange. However, contribution to earnings from the new businesses will only be meaningful starting from FY26 or FY27.

• Headline financial KPI targets for FY23 have been achieved except the number of targeted IPOs, which fell short by 7 at 32 vs. the target of 39. For FY24F, the exchange is targeting to achieve a PBT of RM293mil to RM323mil, which is close to its core PBT of RM290mil in FY23 while aiming for non-trading revenue to grow by 5-7% from FY23. Bursa is aiming for a slightly higher number of IPOs of 42 in FY24 (FY23: 39) with a market capitalisation of RM13bil. For ESG, Bursa is targeting to lower its scope 1 and 2 emissions from FY22 baseline by at least 7.5%.

• Bursa declared a final dividend of 14sen/share, bringing full FY23 dividends to 29sen/share (payout: 93%), which was in line with our expectation.

• The stock is trading at FY24F PE of 24x, above its 5-year historical average of 22x. Hence, we see limited upside potential.

Source: AmInvest Research - 2 Feb 2024