Higher retail participation to bode well for Bursa Malaysia

However, speed bumps such as vaccine hiccups, Covid resurgence, geopolitical tensions and politics will bring volatility along this recovery path


HIGHER retail participation and potential return of foreigners, which is favourable for the average daily volume (ADV), is expected to bode well for Bursa Malaysia Bhd, although the recovery path remains volatile.

Hong Leong Investment Bank Bhd (HLIB) analyst Jeremy Goh said the research house raises the financial year 2021 (FY21) and FY22 earnings projections by 4% and 8% respectively based on the forecast.

“We maintain our consensus view that 2021 will be a vaccine-led recovery year.

“However, speed bumps such as vaccine hiccups, Covid resurgence, geopolitical tensions that are between the US and China, and fluid domestic politics will bring much volatility along this recovery path, possibly inducing heightened trading activity,” he said in a note yesterday.

HLIB maintained its ‘Buy’ rating for Bursa Malaysia with a higher target price (TP) of RM11.49.

Goh added that while the first quarter of 2021 (1Q21) performance may be lower quarter-on-quarter (QoQ), it is still significantly higher year-on-year (YoY).

“Judging for the 1Q21 ADV of RM5.08 billion and average daily contracts (ADCs) of 79,900, and barring any unforeseen swings in cost structure, we estimate that core earnings for the quarter could come in at RM108 million, forming 35% of our initial FY21 earnings forecast and 32% of consensus.

“If met, this implies a 7.9% QoQ dip in core earnings as higher ADV and ADCs (5.2% and 12.5%) is more than offset by fewer trading days, whereas there are 60 days for 1Q21 and 64 in 4Q20,” he said.

He added that on a YoY basis, the 1Q21 core earnings estimate suggests a 66.9% jump as ADV doubled.

“All in, we have pencilled in ADV of RM3.43 billion for FY21, which is lower than FY20’s exceptional RM4.21 billion, but still much better than the pre-Covid highs of RM2.3 billion to RM2.4 billion for FY17-FY18.

“Timeline wise, we expect ADV to soften QoQ in 2Q21 but regain momentum in the second half of 2021 as ‘election trading’ sets in, particularly among local investors, taking cue from the state of emergency which is slated to end on Aug 1, 2021,” he said.

In addition, the factor of average retail participation is expected to remain strong, which should lend some downside support to the market.

“Average retail participation in 1Q21 stood at 39.3%, while the retail ADV was at RM1.99 billion alongside net buys of RM5.36 billion.

“We believe that retail participation is now on a structurally higher base with the average participation rate at 39.6% post automatic loan moratorium versus the 10-year pre-Covid mean of 24%,” he said.

Meanwhile, the return of foreigners in shareholding is expected to give way into the recovery, despite foreign shareholding standing at a record low by the end of March.

“However, we reckon green shoots are emerging with 4Q20 versus 1Q21 numbers, seeing foreign participation rising from 15% to 16.7% and their net selling tapered from RM2.29 billion to RM1.73 billion.

“At current foreign shareholding levels, we reckon the base appears palatable to envision their re-entry, especially if they turn ‘risk on’ amid a vaccine-driven recovery climate,” he said.

He said, however, fluid domestic politics remains a key risk.

On the higher TP, the research house inched up from RM11.46 to RM11.49 based on 29 times private equity tagged to FY21 earnings per share.

“Our applied price to earnings multiple is +2 in standard deviation above five-year mean, justified by an earnings base that is higher than its pre-Covid peak earnings and that is in line with its regional peers average (Singapore Exchange, Hong Kong Exchange, Australia Exchange and New Zealand Exchange),” he said.