• Economic forecasts intact. We believe that the impact of the recent political upheavals will be transitory. Despite the downside risks, we keep GDP growth at 4.0% YoY for 2020F. This was recently revised down from 4.3%, after taking into account the COVID-19 outbreak and US-China trade war.
• Bank Negara (BNM) to wait and see. We believe BNM will likely maintain the Overnight Policy Rate for now, pending the announcement of the mooted economic stimulus measures, and to see the impact of the recent January rate cut. This assumes that the viral outbreak can be contained in the coming weeks. A worsening of the COVID-19 situation would mean higher downside risks to economic growth that will force BNM’s hand.
• Risky business. The elevated risks and uncertainty mean that, in the near term, the priority for equity investors should be the preservation of capital, with core holdings in defensive and resilient high-yield stocks. The duration of this strategy depends on political stability returning and evidence of COVID19 being successfully contained. Further out, investors also need to begin positioning for a cyclical recovery. This involves gradually accumulating stocks in the cyclical banks, oil & gas, construction, plantations, gaming and rubber products sectors. The recent developments prompt us to cut our end2020 FBM KLCI target to 1,600 pts (from 1,700 pts) after ascribing a 16.5x (from 17.5x) PE to forward earnings.
When It Rains, It Pours
Figure 1: Impact from COVID-19 and political turmoil
Sector: Auto
Impact: Negative
Comment: It should have a minimal direct impact on the local automotive industry. However, if the local situation is exacerbated, industry sales will be negatively impacted as consumers may hold back on discretionary spending. The impact will be negative on Sime Darby, as it has significant operational exposure to China. If the situation is prolonged, there could be a supply chain disruption risk to Proton, as the X70 CKD kit is sourced from China.
The uncertainties are negative for consumer sentiment. Consumers might hold back big-ticket item purchases, which would lead to lower car sales. The weaker MYR could increase auto distributors’ cost of goods sold and compress margins. Most imported vehicles and CKD kits are USD- or JPY-denominated. UMW and Tan Chong will be affected the most by the USD strengthening. Meanwhile, a weaker MYR against the JPY will affect MBM Resources, UMW and, to some extent, Bermaz Auto.
Sector: Aviation
Impact: Negative
Comment: We expect travel demand to decline due to fear of the COVID-19 outbreak spreading. On political uncertainties, it is slightly negative to aviation as the decision on the regulatory asset base (RAB) framework should be delayed. We are now assuming 2H19 as the earliest period for any decision made.
Sector: Banks
Impact: Negative
Comment: Concerns over the potential slowdown in China’s economic growth will weigh on business sentiment, while measures taken to contain the spread of the virus will also dampen business activities. We expect loan growth to remain subdued in 1Q20, with prospects of a pick-up in 2H20 still intact – assuming the outbreak is contained by 2Q20. The possibility of another OPR cut to support GDP growth will be a downside risk to earnings.
The country’s current political developments will further dampen prospects in the banking sector. Postponement of the economic stimulus package to mitigate the impact of the COVID-19 outbreak, coupled with added cautiousness among businesses, suggest that business activities may not pick up as hoped for in 2H20. We see downside risk to our system loan growth forecast of 3.6% for 2020, and the possibility of increased asset quality pressures as businesses are hit by falling revenues, and NIM slipping from cuts in the policy rate.
Sector: Basic Materials
Impact: Negative
Comment: Aluminium prices (in tandem with that of other base metals) have eased, on fears of lower demand – with China accounting for over half of global consumption. However, this will be potentially mitigated by supply disruptions as well as lower alumina raw material prices.
A delay or scaleback in infrastructure project awards will negatively impact the demand for building materials
Sector: Construction
Impact: Negative
Comment: The travel restriction on Chinese workers presents a downside risk, but it looks muted for now. While this creates a delay for workers reporting to work, the impact of a labour shortage is likely temporary and mostly manageable. New recruits could always be sourced from existing pipelines, which we understand is always high in supply.
This will impact sentiment negatively, as prospect on the near-term turns unclear. Restored projects could see delays in approval as well as job awards, leading to slowdown in construction activities. While this could hinder growth in the immediate term, the worries at hand could appear excessive, as the possibility of project cancellation seems remote.
Sector: Consumer
Impact: Negative
Comment: If the situation is prolonged, and/or there are cases of locals being infected, we will likely to see a reduction in tourist arrivals, while locals will also opt to stay home. This could all lead to lower footfalls to retail stores. Taking into account the fixed operating costs and lower volume, profitability will be under pressure for retail-based businesses. The stocks under our coverage that could be affected include AEON, Padini, Mynews and Berjaya Food.
The soft consumer sentiment could be further dampened by political uncertainty. Existing and new governmentpolicies or measures to spur consumer spending may be subjected to changes or delays.
Sector: Gaming
Impact: Negative
Comment: Earnings for Genting Malaysia (GenM) and Genting (GenT) should be negatively impacted by COVID-19, as visitor arrivals will decline. During the peak of the SARS pandemic, GenM’s 2Q03 PBT for the leisure & hospitality segment plunged 24% YoY. However, FY03’s figure only declined by 3%, as 2H03 earnings came in stronger after the pandemic stabilised. Similarly, its share price quickly rebounded within 1-2 months after both GenM and GenT posted declines of 22% and 23% respectively from February to Apr 2003.
As for the current political turmoil, both Genting Malaysia and Genting, which have high foreign shareholdings (GenM:c.27%, GenT: c.34%), may be negatively impacted by the higher foreign fund outflow. Furthermore, the potentialdelay of the economic stimulus package due to the unclear leadership will slow down the tourism sector’s recovery.As for the number forecast operators, ticket sales might be negatively impacted on the weaker consumer sentiment.
Sector: Healthcare
Impact: Positive
Comment: The fear of the COVID-19 outbreak spreading bodes well for this sector, as it implies increased demand for healthcare services. Pharmaceutical companies should also benefit, as the greater need to boost immune systems will lead to an increased demand for vitamins.
The political uncertainties should have a neutral impact on the healthcare sector, as the listed healthcare companiesare run professionally with little political influence.
Sector: Healthcare
Impact: Positive
Comment: The fear of the COVID-19 outbreak spreading bodes well for this sector, as it implies increased demand for healthcare services. Pharmaceutical companies should also benefit, as the greater need to boost immune systems will lead to an increased demand for vitamins.
The political uncertainties should have a neutral impact on the healthcare sector, as the listed healthcare companies are run professionally with little political influence.
Sector: Logistics
Impact: Neutral
Comment: Supply chain disruptions affecting the movement of goods in and out of China could present some uncertainty on ports, courier volumes, as well as shipping costs. However this is expected to be short-lived.
The political uncertainties have a neutral impact on the logistics sector as the listed logistics companies are runprofessionally, with little political influence.
Sector: Media
Impact: Neutral/Negative
Comment: Our base case assumption is for the COVID-19 outbreak to not be extended beyond 1H20, which would offset the potential upside from major advertising expenditure (adex) events such as UEFA Euro 2020, the 2020 Olympics and Visit Malaysia Year.
The unprecedented political developments will further weigh on consumer and business sentiment, compounding thedownside risk to adex.
Sector: Non-Bank Financials
Impact: Negative
Comment: No direct impact from COVID-19. However, if the situation is prolonged, this will lead to a further slowdown in economic growth, and this, in turn, may dampen the demand for general insurance products.
The heightened political uncertainties pose a greater risk to the sector. Waning business sentiment could further dampen demand for general insurance on slower economic activities, while lending to consumers may be hobbled on weaker consumer sentiment. While we do not foresee any massive layoff of civil servants, their consumption could be negatively impacted due to the major overhang arising from the potential changes in leadership.
Sector: Oil & Gas
Impact: Neutral
Comment: COVID-19 has had a negative impact on oil demand, and we now expect a subdued 1H20F, while a rebound in the oil demand/price is expected in 2H20F. We maintain our crude oil price assumption at USD62.30/bbl for 2020.
However, we do not expect local oil & gas activities to be delayed significantly, at this juncture.
On the other hand, local oil & gas activities are unlikely to be affected materially by the change of government, as the country has to keep up its oil & gas production. That said, several unresolved issues such as the ownership of petroleum resources in East Malaysia and oil royalty rates should be the key discussions of the new government.
Sector: Plantations
Impact: Negative
Comment: As palm oil is a basic food staple, demand should not be affected, as was the case during the SARS breakout. During the SARS breakout, CPO exports to China from Malaysia actually rose 38% YoY in 2003 and again by 10.5% in 2004. Demand for Malaysian palm oil from China of 2.5m tonnes in 2003 is similar to the volume China imported in 2019.
This could result in uncertainty with regards to the implementation of the B20 biodiesel mandate in Malaysia, as well as the implementation of a biodiesel subsidy plan using a portion of windfall tax collection to fund biodiesel players. In addition, any progress made in negotiations with the EU and collaborations with Indonesia by the previous Minister may be lost, in the wake of a change in government officers.
Sector: Property
Impact: Negative
Comment: The property market is very much domestically-driven and, given the clampdown on speculative buying since 2014, the number of foreign buyers has decreased significantly. However, the outbreak will nonetheless spark marke concerns on economic growth – so sentiment on the property market may be dampened again.
The property market sentiment is now worsened by the uncertainties caused by the ongoing political turmoil. Demand for property will likely be dampened over the near term, while developers will likely hold back even more launches especially in 1H20. Meanwhile, approvals for projects may also be delayed during this transition period.
Sector: REITs
Impact: Negative
Comment: The impact of the COVID-19 outbreak on REITs, at this juncture, is minimal. Nevertheless, retail REITs with a significant presence in the city centre are likely to be under pressure, ie KLCCP Stapled, Pavilion REIT, as their prime retail assets (Suria KLCC, Pavilion Mall Kuala Lumpur) count as visitor attractions with high exposure to tourists. A prolonged outbreak may affect earnings, especially if requests for rental rebates are acceded, so we will monitor the health crisis closely. For now, the REITs sector is still a safe haven, given its defensive nature.
With the uncertainty in the political sphere, the highly-anticipated stimulus package – which is expected to bring some much-needed relief to the hospitality and retail segments following the COVID-19 outbreak – is now a mild cause for concern as the new date for its announcement has yet to be ascertained by the interim prime minister. Pandemic concerns aside, the plausible worsening of already-slowing economic growth as a result of political turmoil will dampen consumer sentiment– adversely impacting business activity in the oversaturated REIT sub-sectors.
Sector: Rubber products
Impact: Positive
Comment: The fear of the outbreak bodes well for rubber glove makers – as demand for rubber gloves spikes up. Beyond this increase in the near term, we expect health awareness to rise faster – which is positive for long-term demand growth.
For the political uncertainties, it is short-term positive to the sector if the MYR weakens. Note that close to 100% of gloves are exported, with 50-60% cost in denominated in USD.
Sector: Technology
Impact: Negative
Comment: Should the COVID-19 outbreak take longer to be contained, it could affect the sector negatively due to the disruption in supply chain and/or underlying demand stemming from weak consumer spending.
Most of the exporters are unperturbed by domestic political turmoil. However, government-related players such Datasonic Group, GHL Systems and Prestariang may be adversely affected in terms of potential contract delays or termination (as seen from past experience)..
Sector: Telecommunications
Impact: Neutral
Comment: The impact of the COVID-19 outbreak is expected to be minimal, with contributions from roaming revenue to industry revenue projected at 10%.
There may be some policy implications based on developments that unfolded post the 14th general election (GE14), with potential delays in the execution of the National Fiberisation and Connectivity Plan (NFCP) and spectrum allocations. That said, the Malaysian Communications and Multimedia Commission (MCMC), as the industry regulator, has statutory powers and its own budget (universal provisioning fund) which should mitigate near-term risks.
Sector: Utilities
Impact: Neutral
Comment: We believe the event will not materially impact overall domestic electricity demand and independent power produce earnings are likely to be unaffected. All in, we are keeping our electricity demand growth assumption at 2-3% for 2020 (vs 9M19’s 3.2%), in view of the slower economic activities.
We do not believe that the political turmoil will have a material impact on the sector, given that near-term earnings should still be safeguarded by the IBR framework, imbalance cost pass-through (ICPT) mechanism and contracted power purchase agreements. However, the regulatory reform could be delayed and the push for renewable energy can be put on hold pending the formation of a new government.
Figure 2: Earnings outlook and valuations
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longerterm outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
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