Decline in equity ADTV looks priced in

■ We see lacklustre trading activities in the capital markets in 4Q21, with declines of 46.2% yoy in equity ADTV and 0.5% yoy in derivative ADC.
■ Hence, we expect Bursa’s 4Q21F net profit to plunge by 51.9% yoy to RM50.5m. FY21F net profit should be 9.1% below our previous forecast.
■ We upgrade Bursa from Reduce to Hold as we think that the decline in equity ADTV is priced in (CY23F P/E of 20.6x is below 5-year average of 21.1x).

Expecting lower 4Q21F net profit due to weak equity ADTV

Bursa Malaysia plans to release its 4Q21 final results on 28 Jan 2022. We expect its 4Q21F net profit to decline yoy and qoq due to weak trading activities in the capital markets. This is due to in the declines of 11.3% qoq and 46.2% yoy for the 4Q21 average daily trading value (ADTV) of the equity market. We also estimate that the average daily contracts (ADC) for the derivative market dipped by 0.5% yoy to 70.7k in 4Q21.

A potential plunge in 4Q21F net profit

We estimate Bursa’s 4Q21F net profit at RM50.5m, the lowest since 4Q19 (before the outbreak of Covid-19), based on assumptions for yoy declines of 46.2% in equity income and 0.5% in derivative income, on par with a yoy drop in the equity ADTV and derivative ADC. This would translate into declines of 51.9% yoy and 36.8% qoq for 4Q21F net profit.

FY21F net profit would be below expectations

Based on our estimated net profit of RM50.5m in 4Q21F, Bursa would have recorded a net profit of RM340.8m in FY21F, which would be 9.1% lower than our previous projected FY21F net profit of RM374.7m (before the earnings adjustment in this report) but largely in line with Bloomberg consensus’ estimate. As such, we reduce our projected FY21F net profit by 9.1% as we cut our assumed equity ADTV by 11.2% for FY21F. However, our target price of RM6.59 is intact, as it is still based on a target FY23 P/E of 21.1x (on par with the 5-year historical average).

Factoring in a decline in FY22F equity ADTV

We factor in a decline in the assumed equity ADTV from RM3.56bn in FY21F to RM2.56bn in FY22F (vs. RM4.21bn in FY20F and pre-Covid-19 level of RM1.93bn in FY19), due to relaxation of movement control measures and higher stamp duty rate (which will elevate investors’ transaction costs). With this, we project a 36.8% drop in Bursa’s FY22F net profit.

Upgrade to Hold

We upgrade Bursa from Reduce to Hold as we think that the decline in equity ADTV has been priced in. This is because its share price has fallen by 14.5% since the announcement of Budget 2022 in Oct 21 (when the government proposed a higher stamp duty fee rate), pushing down its CY23F P/E from 24.1x on 1 Nov 2021 to 20.6x currently (which is below the 5-year historical average of 21.1x). Its FY22F dividend yield is also decent at 3.7%. We prefer Hong Leong Bank for exposure to the Malaysian financial services sector.