This article first appeared in The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

BURSA Malaysia Bhd is likely to chalk up better earnings this year on the back of an expected rebound in stock market trading activity after a relatively lacklustre two years.

Analysts say they expect two developments this year — one, a pivot in the policy stance of the US Federal Reserve, which is widely projected to start cutting interest rates in the second quarter after having raised rates by a total of 525 basis points since March 2022 to fight record inflation; and two, a more stable political climate at home as compared to the last two years when there was a general election (2022) and state polls in six states (2023) — to spur stronger trading interest in the local bourse.

The expected newsflow on sizeable infrastructure projects, such as the Kuala Lumpur-Singapore High-Speed Rail and Mass Rapid Transit 3, will also help, they add.

Higher trading activity on the stock market translates to stronger earnings for Bursa Malaysia. The average daily trading value (ADV) for on-market transactions in the securities market rose to a high of RM4.21 billion in 2020 — a time when many individuals turned to stock market trading whilst confined at home during the Covid-19 lockdowns — before then falling in the subsequent years to RM3.54 billion in 2021, RM2.07 billion in 2022 and RM2.06 billion in 2023. The higher the trading value, the more revenue Bursa Malaysia generates.

“The ADV in the last two years (2022 and 2023) was quite lacklustre as the Fed’s tightening of interest rates had reduced [investors’] risk appetite for emerging markets, while political events [the GE and state elections] at home saw a higher risk premium ascribed to Malaysia.

“Now that the two main hiccups holding back ADV have diminished, we think that this year will be a better year for ADV,” Jeremy Goh, an analyst from Hong Leong Investment (HLIB) Research, tells The Edge.

He forecasts that ADV will move up by 14.5% to RM2.354 billion this year, from RM2.06 billion last year.

In a Jan 17 report, Goh observes that past trends also suggest that ADV will move up more strongly this year.

“Since the global financial crisis (2009) … ADV has never fallen year on year (y-o-y) for more than two consecutive years. On top of that, the subsequent year after an ADV decline period tends to see a healthy recovery.

“To illustrate: (i) ADV fell 7.4% in FY2012, followed by a 21.7% increase in FY2013; (ii) FY2015 and FY2016’s drop of 3% and 9% respectively saw a 27.7% recovery in FY2017; and (iii) FY2019’s 19.3% contraction witnessed a subsequent surge of 118.1% in FY2020,” he says.

“[Hence,] after two straight years of ADV decline in FY2021 and FY2022 (-15.8% and -41.7%), and a flattish FY23 (-0.6%), we think a meaningful recovery could materialise this year.”

Meanwhile, RHB Research sees ADV growing 17% this year to RM2.7 billion from about RM2.3 billion last year. (Its numbers include both on-market as well as direct business transactions.)

The year has certainly gotten off to a strong start in terms of trading activity in the securities market, helped in part by the strong turnover in small-cap stocks and lower liners. These include battered stocks such as Rapid Synergy Bhd, YNH Property Bhd and Sarawak Consolidated Industries Bhd that hit limit-down several times this year.

The ADV for the month to date (as at Jan 24) stands at RM3.39 billion, already higher than that of the whole of last year.

“It’s hard to ascertain the overall impact of the recent selldown in the lower liners [on Bursa]. It does provide a short-term boost to ADV, but in the process, some retail investors would have probably gotten burnt, so there is some degree of wealth destruction there, which might impact future ADV. That being said, I don’t believe it will result in a long-term dent on ADV,” Goh tells The Edge.

Bursa Malaysia, which reported a net profit of RM192.8 million for the nine months ended Sept 30, 2023 — an 8.6% y-o-y increase — is expected to release its 4QFY2023 results on Wednesday (Jan 31).

HLIB Research estimates that Bursa will record a core net profit of RM59.6 million in 4QFY2023 (up 21.5% y-o-y, but down 1.4% quarter on quarter (q-o-q)). This is based on ADV in the securities market for that quarter having come in at RM2.2 billion (up 12% y-o-y and 2% q-o-q) and the average daily contracts in the derivatives market standing at 69,000 (down 13% y-o-y and 6% q-o-q).

“If our 4QFY2023 core earnings estimate is accurate, this would bring full year FY2023’s sum to RM225.1 million, finishing flat (-0.6%) against FY2022. Our core earnings estimate strips off the reversal of prior sales and services tax provision (RM27.3 million in 2QFY2023),” it says.

Its full-year earnings forecast represents 95% of that of the consensus.

Bursa Malaysia’s share price has moved up a solid 8.6% since mid-December 2023 — reflecting stronger trading activity on the bourse — closing at RM7.30 on Jan 24 for a market capitalisation of RM5.91 billion. The stock has gained 12.8% over the last 12 months.

RHB Research, which has a “buy” call on Bursa Malaysia, believes the stock has more legs to run.

“We … believe investors could benefit from short-term trading of the stock, given its moderately strong correlation to securities market activity,” the research house says in a Jan 17 report.

HLIB Research has a “hold” call on the stock as it believes all the positives have already been priced in, but raised the target price slightly to RM7.12 from RM7.03.

Bloomberg data shows that six analysts have a “buy” call on Bursa Malaysia while eight have a “hold” and two have a “sell”. The average 12-month target price stood at RM7.02.

“We raise Bursa Malaysia’s target price to RM8.10 from RM7.30, based on an implied FY2024 PER of around 24.7 times. We note that Bursa Malaysia is trading within the average regional peers PER of 22 times (Singapore stock exchange: 20 times, Hong Kong stock exchange: 23 times, Australia stock exchange: 26 times),” TA Securities, which has a “buy” call, says in a report last Wednesday. 

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