• Top Picks: Bursa Malaysia (BURSA) and AEON Credit Service (ACSM). Sector results for the Jun 2024 quarter were largely in line with our estimates. We see several catalysts for the sector in the near term, such as the start of the US Federal Reserve’s rate cut cycle and the civil servant salary revision. However, valuation profiles are mixed across the sector – so we advocate a more selective approach, prioritising undervalued high-growth stocks and/or companies with potential dividend upsides. NEUTRAL.

• BURSA – still optimistic. Its 1H24 net profit of MYR155.5m (+17% YoY) met our and Street expectations. Post-results, management raised its 2024 PBT target to MYR361-379m (from MYR273-323m), which is still rather conservative, in our view. The group is cautious of potential risk-off behaviour arising from ongoing geopolitical developments, but sees upside potential from its strong IPO pipeline and continued securities market strength. The commencement of the US Federal Funds Rate cut cycle is also positive for domestic trading liquidity. As such, BURSA remains on track to deliver record-high securities average daily value (SADV) (ex-pandemic period) in 2024 (8M24: MYR3.6bn). While no confirmation has been provided by management, we also note that BURSA has a track record of paying out special dividends in years of record-high SADV, and it is currently holding on to cash in excess of optimal levels.

• Insurance – staying selective. Underwriting margins for both insurers dipped c.3ppts at the group level, driven by elevated claims and acquisition costs. Nevertheless, investment returns were up >30% YoY on marked-to-market (MTM) gains and continued portfolio expansion. Moving forward, we think the strong investment performance for both insurers can continue, especially with the onset of the global rate cut cycle, which is positive for MTM investment gains. On the other hand, we do not see much near-term benefit arising from the introduction of mandatory co-payment options, as meaningful co-payment take-up will require time. We prefer Syarikat Takaful Malaysia Keluarga (STMB) over Allianz Malaysia (ALLZ) for: i) its smaller portion of participating contracts, allowing it to retain a bigger portion of its investment returns; and ii) its laggard status and undemanding valuation.

• Non-bank lenders – a major catalyst on the horizon. ACSM’s results met expectations, while RCE Capital’s (RCE) and ELK-Desa Resources’ (ELK) numbers missed forecasts on slower-than-expected disbursements and sharper-than-expected credit costs respectively. Receivables growth remained robust at double-digits YoY for both ACSM and ELK, while RCE deliberately slowed down disbursements to prioritise asset quality. Looking ahead, the sub-sector should benefit from the revision to the civil servants’ salary scheme on both the receivables growth and asset quality fronts, but the impact of subsidy rationalisation measures remains to be seen. For now, asset quality looks decent – ACSM and ELK are expecting credit costs to trend downwards, while RCE’s provisioning could benefit from less exits from the civil service with the salary revision. ACSM is our preferred pick for the sub-sector, given its undemanding valuation (lowest P/E in the sub-sector) and multiple growth engines, including its up-and-running digital bank, while management had also previously hinted at potentially raising dividend payouts.

Source: RHB Securities Research - 24 Sept 2024