Based on recent development, there are encouraging signs that foreign participation in the local stock market is returning

by AMIR AZLAN / Pic by TMR FILE PIX

BURSA Malaysia Bhd is expected to post a core earnings of RM66 million in the third quarter 2021 (3Q21) judging from lower average daily volume (ADV) of RM2.89 billion (-23% quarter-on-quarter [QoQ], -49% year-on-year [YoY]) and derivatives average daily contracts (ADCs) of 70.6k (-11% QoQ, +2% YoY), and barring any unforeseen swings in cost structure.

Hong Leong Investment Bank Bhd (HLIB Research) in a report yesterday noted that if the firm’s prediction is right, this would imply core earnings contraction of 26% QoQ due to sequential fall in both ADV and ADCs.

“Our 3Q21 core earnings estimate indicates that 9M21’s number could total RM276 million. This would translate to 86% of our financial year 2021 (FY21) forecast (RM321m) which we would deem inline as our imputed full year ADV assumption of RM3.54 billion (-16% YoY; 9M21 actual: RM3.9 billion) already implies that the second half (2H) ADV will be -40% lower versus 1H,” said analyst Jeremy Goh.

Jeremy added that ADV has been a downward trend based on month-on-month basis from February (RM5.22 billion) to August (RM2.56 billion).

“However, this recovered in September and MTD-October (RM3.07 billion-RM3.17 billion) on the back of economic reopening sentiment, we believe. While this overall downward normalisation is expected, as trading euphoria recedes from the previous steep increase during the first quarter of 2020 (1Q20)-1Q21, both year-to-date ADV (RM3.87 billion), and current levels are still meaning fully above the pre-Covid highs seen in FY17-FY18 (RM2.31 billion-RM2.39 billion).

“Looking ahead into 4Q21, we reckon there could be some QoQ reprieve for ADV, perhaps around the low-RM3 billion mark, which is our assumption for FY22 as well (RM3.11 billion). This should be driven by continued “reopening recovery” sentiment and the traditional year-end window dressing phenomenon,” he said.

He added that the research outfit also foresees a rebound in foreign investors inflow as they flock into Bursa as the nation is heading into the endemic phase.

Jeremy said, based on recent development, there are encouraging signs that foreign participation in the local stock market is returning as foreign ADV has been trending up from RM521 million in July to RM652 million in September (MTD-October: RM588m) and their participation rate rose from 17.3% in July to 21%-22% in AugustSeptember (MTD-October: 18.5%).

“We think that foreign shareholding in Malaysian equities has scrapped the bottom of the barrel at 20.2% from JulyAugust, before inching up to 20.4% in September. After 25 months of consecutive net selling by foreigners, the tide finally turned in August-September where they net bought RM1.92 billion,” he wrote in a report yesterday.

HLIB Research has maintained its ‘Buy’ call but with a lower target price of RM8.93 previously RM9.91 as they roll forward from their earning per share from 2021 to mid-2022 with a lower earnings base and lower price earnings multiple of 24x from 25x based on 0+1SD above 5Y mean.

The report also added, while the upcoming results present another sequential earnings decline, they are optimistic towards Bursa’s outlook, backed by ADV recovery prospects in 4Q21 and its potential for another round of special dividend.