Thursday, September 5, 2013

Making macro headway (CIMB)

Making macro headway
We view positively the government's decision yesterday to raise petrol prices and proceed with MRT 2 & 3 while deferring projects with high import content. This should help assuage concerns over the budget deficit and narrowing current-account surplus.

 The property and construction sectors should be big winners while the likelihood of tariff adjustments for Tenaga has increased. While many other sectors could be losers, the net impact could be renewed confidence in Malaysia's economic outlook. We remain Positive on Malaysia and keep our end-2014 KLCI target of 1,920 pts (15.9x P/E or 10% premium to its 3-year MA). Market catalysts include a stabilisation of regional markets and additional responsible fiscal policies.

What Happened
Yesterday, Prime Minister Datuk Seri Najib Razak announced price hikes for RON95 petrol and diesel by 20 sen a litre to RM2.10 and RM2.00 respectively and the rescheduling of several public-sector projects. This will save the government RM1.1bn in subsidies for the rest of this year and a further RM3.3bn annually. The hikes will also help address the narrowing current-account surplus.

 What We Think We are positively surprised at the quantum of the hikes as we had thought prices would be raised by 10 sen at a time to make the hikes more palatable. This shows the political will of the government and its intent on tackling the budget deficit and BOP. Although petrol price hikes are historically negative for the market, this time should be different as investors are far more concerned about fiscal discipline. The move should go a long way in alleviating their worries.

What You Should Do
Investors should accumulate positions as recent investor concerns are being addressed head-on by the authorities. Our preferred sectors remain the ETP winners i.e. O&G, construction and property.

New government measures
The Prime Minister has outlined a slew of measures to get Malaysia's fiscal deficit and government debt back into shape, as well as ensure a healthy current-account surplus in its balance of payments (BOP). These include: 1) the resumption of subsidy rationalisation on a gradual basis, starting with a 20 sen or 10.5% hike in the retail price of RON95 petrol to RM2.10/litre and 20 sen or 11.1% hike in diesel to RM2.00/litre, effective 3 Sep. Previously, the government had subsidised 83 sen for every litre of RON95 petrol sold, and RM1.00 for every litre of diesel sold. This will bring its total fuel-subsidy allocation for 2013 to RM24.8bn or 11.9% of revenue or 2.5% of GDP. A reduction of 20 sen in fuel subsidies would still mean a subsidy of 63 sen per litre of RON95 and 80 sen per litre of diesel.

Sector and stock impact
There should be more losers than winners from the higher petrol prices and historically, such hikes are negative for the market. Obvious losers are the auto and consumer sectors as costlier fuel will make it more expensive to travel and eat into household disposable income. The impact on the other sectors should be far milder but will be overall negative, nonetheless. The only clear winners are those that can benefit more from sentiment. Property developers should be winners as inflationary fears manifest themselves in higher property prices due to perceptions that physical properties are inflationary hedges. This was the experience after the big petrol price hike in 2008. The construction sector can also be a winner as reaffirmation of MRT 2 & 3 will be a big relief and more than offset higher transport and raw-material costs for contractors. The power sector or more specifically, Tenaga, should also be winners as the chances of an electricity price hike and tariff passthrough formula have increased now that subsidy reduction has resumed.

Stockmarket impact
The new measures come on the back of several recent negative developments, including: 1) Fitch Ratings’ downgrade of its outlook for Malaysia from 'stable' to 'negative' due to the country's relatively high government debt and budget deficit; 2) sharp falls in regional stockmarkets and currencies due to the Federal Reserve's upcoming tapering moves and investors’ concerns over twin deficits in several emerging markets; and 3) Malaysia's announcement of weaker-than-expected 2Q GDP growth and a steep narrowing of its current account surplus on Aug 21. These macro concerns are major overhangs for the stockmarket and any moves to address them, though negative for individual sectors and stocks from a bottom-up perspective, are nonetheless positive. The measures are evidence of the political will to bite the bullet and get the subsidy rationalisation programme back on track after a lull of 1-2 years in the lead-up to the 13th general elections.

Valuation & recommendation
Overall, we are positive on the government's bold decision to raise petrol prices meaningfully and proceed with the critically important MRT 2 & 3 projects while deferring public-sector projects with high import content and a lower multiplier impact. This should help to alleviate concerns about the government's nagging budget deficit and the country's rapidly-narrowing current-account surplus.

The property and construction sectors should be major winners of the boost in confidence while Tenaga should also benefit from the increased likelihood of a tariff adjustment. While many other sectors could be losers, the net impact should be a much-needed injection of confidence in Malaysia's economic outlook. We remain Positive on Malaysia and keep our end-2014 KLCI target of 1,920 pts based on an unchanged 15.9x P/E (10% premium to its 3-year moving average). Our preferred sectors continue to be Economic Transformation Programme winners, including oil & gas, construction and property.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 03/09/13

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