This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022

The year 2020 turned out to be an exceptionally good one for Bursa Malaysia Bhd — trading activity in the stock market surged as retail investors made a strong comeback, helping to push the group’s earnings to a record high.

The average daily trading volume for equities rose to an all-time high of 7.32 billion shares that year from 2.51 billion in 2019, even as the average daily trading value reached new heights at RM4.21 billion compared with RM1.93 billion before. A low interest rate environment, coupled with government stimulus packages that put money in the hands of the people, helped fuel the buying interest amid the Covid-19 pandemic.

Hence, it was no surprise that the stock market operator’s profit after tax (PAT) for the financial year ended Dec 31, 2020 (FY2020), doubled to RM377.75 million from RM185.86 million in FY2019.

However, in FY2021, Bursa Malaysia’s PAT declined 6% to RM355.3 million as the trading fervour subsided. The average daily trading volume and value that year dropped to 5.71 million shares and RM3.54 billion respectively. (The lower the trading value, the less revenue Bursa Malaysia generates.)

Nonetheless, the solid financial performance in recent years helped push the group’s adjusted weighted return on equity (ROE) over the three years between FY2019 and FY2021 to 38.9%.

This led to Bursa Malaysia bagging — for the second straight year — The Edge Billion Ringgit Club (BRC) award for highest ROE over three years in the financial services sector for the category of market capitalisation below RM10 billion.

According to the BRC methodology, its adjusted weighted ROE came in at 22.7% in FY2019, 45.5% in FY2020 and 41.4% in FY2021.

This year, Bursa Malaysia’s PAT is likely to decline further, given that the average daily trading value of equities has continued to come down. Market sentiment has been negatively impacted by growing risks of a global recession as the US raises interest rates aggressively to curb high inflation.

The benchmark FBM KLCI, which sank to a low of 1,219.72 points on March 19, 2020, went on to hit a high of 1,684.58 on Dec 11, 2020. Since then, it has dropped 14.1% to close at 1,447.31 on Oct 28 this year.

In 3Q2022, the average daily trading value of equities declined by 42.2% year on year to RM1.74 billion, making it the fifth consecutive quarter of 40% to 50% y-o-y declines.

“Moreover, the 3Q2022 equity average daily trading value was 21.4% lower than the pre-Covid-19 level of RM2.22 billion (12-quarter average from 1Q2017 to 4Q2019),” notes CGS-CIMB Research in an Oct 12 report on Bursa Malaysia.

“The y-o-y slump in 3Q2022 … was largely in line with our expectation given cautious market sentiment as a result of macro headwinds from heightened inflation and market concerns about a potential recession in the US and Europe. These factors likely had a negative impact on the overall corporate earnings of listed companies in Malaysia’s equity market,” it says.

Bursa Malaysia last week reported a PAT of RM177.57 million for the first nine months of FY2022, which was 38.8% lower than the RM290.3 million it made in the same period a year ago.

At the time of writing, Bloomberg data showed six analysts having a “buy” call on Bursa Malaysia’s stock versus eight with a “hold” and two with a “sell”. The 12-month consensus target price was RM6.61. The stock closed at RM6.40 on Oct 28, giving the company a market capitalisation of RM5.18 billion.

One of the reasons investors go for the stock is for its dividends. Bursa Malaysia has rewarded shareholders with a special dividend in three out of the last five years, thanks to its cash pile. Shareholders received a dividend per share of 20.8 sen in FY2019, 51 sen in FY2020 (of which eight sen was a special dividend) and 41 sen in FY2021.

Despite there being limited scope for a strong recovery in the average daily trading value for equities in the next one to two quarters, CGS-CIMB is maintaining its “hold” call on Bursa Malaysia as it believes all the negative news have been priced in. The stock is also supported by a dividend yield of 3.9% for FY2022, it notes.

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