This article first appeared in The Edge Financial Daily, on February 4, 2016.

Bursa Malaysia Bhd
(Feb 3, RM8.20)
Maintain underperform with a target price (TP) of RM7.60: Bursa Malaysia Bhd’s (Bursa) financial year 2015 (FY15) net profit of RM198.6 million was in line with our and market estimates, making up 103% and 100% of the full-year forecasts, respectively. The better results were attributed to higher derivatives trading revenue.

As expected, a final dividend per share (DPS) of 18 sen was declared, bringing the total DPS for FY15 to 34.5 sen, implying a payout ratio of 93% (FY14: 92%).

Year-on-year (y-o-y), the decent showing can be attributed to a slightly better operating revenue growth at 3.5% (FY14:7.1%). Operating revenue grew primarily due to an improved performance in the derivatives market at 22% (FY14: 0.5%) and the stable revenue segment at 4.3% (FY14: 6.1%), but mitigated by a drop in securities trading revenue by 2.5% (FY14: 10%).

In tandem with the improved performance, the derivatives market contribution to total operating revenue also improved to 17.6% (FY14: 14.9%).

Stable revenue improved due to higher growth from the Bursa Suq Al-Sila trading revenue growth of 68.5% to RM16.8 million, attributed to a higher conversion of deposits to murabaha.

The drop in depreciation and amortisation expenses of 6.1% led to total costs rising only by 3.3% and with total income rising by 2.9%, the cost-to-income ratio stabilised at 46.2%.

Weak commodity prices, the weak ringgit, China’s economic slowdown and expectation of a gradual rise in US interest rates will continue to cast a long shadow over the market sentiment.

The current choppy market environment is likely to stay, driving investors to the sideline or exit. For the whole of 2015, foreign net selling in the local bourse reached more than RM19 billion, which seemed to continue with another RM0.97 billion of net selling in the first 19 trading days of 2016. To note, foreign net selling in the fourth quarter of 2015 was only at RM1.3 billion.

Challenging external headwinds still linger and our strategist is now forecasting the local bourse to hit 1,755 points by end-2016, lower than what was initially projected, at 1,775 points, amid weak corporate earnings growth (4%-8% y-o-y for FY16 and FY17), coupled with the weaker investment sentiment.

In turn, we are projecting the average trading value and volume for the equity market this year to be lacklustre at RM1.94 billion (previous forecast: RM2.01 billion) and 1.98 billion shares (previous forecast: 2.3 billion shares). 

As for the derivatives market, we expect the total volume for future contracts to improve by 1.2% y-o-y to 33.5 billion contracts (previous forecast: 33.8 billion contracts).

As there is no change in earnings forecast, we maintain our TP of RM7.60, based on a FY16 price-earnings ratio (PER) of 22 times. This is also in line with the valuation multiples of its regional peers, which are trading at a forward FY16 PER of 20 times. — Kenanga Research