PETALING JAYA: Bursa Malaysia Bhd’s earnings outlook is under pressure from falling trading volumes, which have worryingly gone below pre-Covid-19 average levels.
CGS-CIMB Research noted that average daily trading value (ADTV) on the local exchange fell 22.3% quarter-on-quarter (q-o-q) to RM1.74bil as equity ADTV fell by 42.2% year-on-year (y-o-y) in the third quarter of this year (3Q22).
It was also the fifth consecutive quarter of 40%-50% y-o-y declines in trading volumes.
The bearish market environment has caused the 3Q22 equity ADTV to be 21.4% lower than the pre-Covid-19 level of RM2.22bil (12-quarter average from 1Q17 to 4Q19), the research house stated in a report yesterday.
The volatility in markets, however, saw average daily contracts (ADC) on Bursa’s derivative market rising 12.1% y-o-y and 3% q-o-q in 3Q22.
“We estimate Bursa’s net profit was RM48.9mil in 3Q22, down 38.8% y-o-y, based on key assumptions of a 42.2% y-o-y fall in 3Q22 equity income; a 12.1% y-o-y rise in 3Q22 derivative income; a 3% y-o-y increase in 3Q22 operating cost; and a tax rate of 28%.
“At our 3Q22 net profit forecast, Bursa’s earnings for the nine months of 2022 of RM176.3mil would be within our expectations but below consensus (78.5% of our full-year forecast and 75.3% of Bloomberg consensus),” the research house noted.
The RM176.3mil net profit for the period was a 39.3% y-o-y decline versus the 39.4% y-o-y fall experienced by the exchange operator in the first half of the year (1H22).
The fall in earnings has led CGS-CIMB Research to cut its financial year 2023 (FY23) and FY24 earnings per share (EPS) forecast for Bursa Malaysia by 9% to 13%, as it projected equity ADTV to be lower by 13% to 19%.
“We now expect flattish (y-o-y) market capitalisation for the equity market in 2023, followed by a 2% growth in 2024 (compared to our previous forecast of an 8% growth per year for 2023-24) and market velocity of 27% (versus 29% previously),” it added.
The research house has thus lowered its target price (TP) for Bursa Malaysia from RM7 a share to RM6.60. The new TP is derived based on the average five-year historical price earnings (PE) multiple of 21.5 times for the FY24 EPS of 31 sen.
Despite the cut in forecast, CGS-CIMB Research has maintained a “hold” call on Bursa Malaysia on the assumption the slide in equity ADTV has been priced in to the stock’s current price, given the decline in its valuation. Bursa Malaysia was last traded at RM6.17.
It, however, warned that Bursa Malaysia’s share price could fall to the RM3.40 to RM4.73 range level if its PE falls to the troughs of 11 times during the Covid-19 outbreak and 15.3 times during the global financial crisis of 2008.