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Fitch revises Malaysia’s fiscal deficit forecast on increased govt spending to fund stimulus
SUNBIZ (March 31) PETALING JAYA: Fitch Solutions has revised its 2020 fiscal deficit forecast for Malaysia to 5.7% of gross domestic product (GDP), from 3.9% previously, to reflect the increased expenditure required to fund the combined RM250 billion stimulus package.
It also projects 2020 real GDP growth at 1.2%, revised downwards from 3.7% previously, reflecting its expectation for further stimulus from the government.
Although the RM250 billion package amounts to 17% of GDP, the research arm of Fitch Ratings remains cautious on its effectiveness at stabilising employment and keeping businesses open amid crushing economic headwinds.
“We do not expect this package to significantly improve the economic outlook, even though the large increase in handouts for households will likely help to keep private consumption growth afloat,” it said
As such, Fitch Solutions said it is maintaining its private consumption growth forecast at 1%.
On the negative side, it said most of the help for businesses has come in the form of loans and loan guarantees, rather than cost reduction measures, such as those adopted in China and Singapore.
“We continue to stress the risks to long-term growth and social security from financing stimulus by drawing on pension funds and relying on the private banking sector to absorb the economic shock, especially since any further stimulus is likely to rely on the same funding strategy, given tight fiscal constraints.
“While concessionary loans and loan guarantees for businesses are a positive step, we are of the view that they are only part of the solution. Cost reduction measures are important in helping businesses remain viable, or decide that the current downturn will not exact losses that will be too costly to weather,” it said.
It went on to elaborate that if businesses decide that it is futile to carry on, they will likely not take up the loans that the government is offering or guaranteeing. Furthermore, businesses have to prove that their revenues have contracted by at least 50% in the year-to-date of the application.
“Given that Malaysia was operating normally until March 18 when the movement control order began, most businesses will likely find it hard to qualify until later in the year,” it said.
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This Feeling – The Chainsmokers ft. Kelsea Ballerini
What’s Up Buddy?
Yesterday, Asian stocks ended higher as China’s official manufacturing Purchasing Mangers’ Index for March came in better than market expected. Back home, the FBMKLCI gained 22.01 points (+1.66%) to finish at 1,350.89. Chart-wise, the index remains below all the key SMAs. Coupled with the bearish MACD signal, we expect the index to remain under pressure ahead. Nonetheless, we may see a continuation of yesterday’s intermittent technical rebound from an oversold position.On the chart, we have upped our support levels to 1,310 (S1) and 1,240 (S2). Conversely, the resistance levels are now set at 1,360 (R1) and 1,400 (R2). Today’s technical highlights are DUFU and YINSON (both are not rated).
Banking (Overweight). Looking ahead to the impending downturn ahead, we have slashed earnings estimates of our banking stocks universe by 11% as we revised our loans, and NIM compression downwards with uptick in credit charge. However, looking at their CET1s, we find the stocks well capitalised with the most adverse erosion likely to be buffered by their CET1 ratios that is well above the required regulatory level. Our Top Picks are MAYBANK (OP, TP: RM8.50) and PBBANK (OP, TP: RM18.55) which we believe are prime beneficiaries from a resilient CET1.
TELCO (Overweight). We upgrade our call on the telecommunications sector to OVERWEIGHT from NEUTRAL. Amidst the ongoing slump in the market, we see this as an opportunity to accumulate stocks in a resilient industry. Despite still seeing some declines, telco stocks have mostly fared better than the FBMKLCI. Listed players are facing intensifying competition to cater the growing demand needs of consumers, with unlimited data plans slowly becoming a staple offering between cellcos. We anticipate the rollout of 5G to see some hiccups arising from a new government and to some extent, the ongoing Covid-19 pandemic. Still, we do not anticipate significant swings to our estimated corporate earnings during the year, regardless of it meeting the earlier intended 3QFY20 commercialisation timeline. We present TM (OP; TP: RM4.30) as our Top Pick for the sector, reinforcing our dual strategic view of either (1) it continues to play a significant role in the deployment of 5G infrastructure with its extensive fibre network, or (2) it focuses on its core fixed line and fibre business while riding on its leaner cost structure, with both scenarios resulting in positive outcomes. We also like DIGI (OP; TP: RM4.65) for its consistently high ROE (+200%) and highest dividend yield in the sector (c.4.4%), which could cushion investors in this volatile market environment.
Gaming (Overweight). We upgrade the Gaming Sector to OVERWEIGHT from NEUTRAL as values are emerging as the intense market sell-down has pushed shares to deeply oversold positions and beyond fundamentals as well. Gaming sector is one of the biggest casualties of the COVID-19-driven market meltdown. Players’ share prices were thumped down by between 17%-41% YTD, hitting 52-week low and edged closer to -2SD PBV 5-year mean for NFOs and -3SD PBV 5-year mean for casino operators. As the hit on earnings is expected to be severe especially for casino with a worldwide quarantine restricting travel, attempting earnings estimates at this point are both challenging and dicey. Hence, we switch our valuation method to PBV from the earnings-based SoP and DCF methodologies. We placed a fair value for NFO players at -1SD PBV 5-year mean and ideal entry price set at -2SD while a notch lower for casino players given higher earnings risk. Nonetheless, GENTING is our preferred pick for its deep valuation while for dividend yield seekers, NFOs offer average yield of >6%.
Rubber Gloves (Overweight). Rubber glove stocks under our coverage have performed well following our upgrade eight months ago. Despite easing off from recent peaks, they remain strong outperformers YTD, led by TOPGLOV (+36%), HARTA (+26%), KOSSAN (+23%) and SUCB (+22%). The stage is now set for a solid FY20 following three quarters of anemic quarterly earnings growth. Coming off this low base due to the lackluster demand of the past 12 months, forward earnings growth will be amplified on re-stocking activities ramp-up and to be boosted by better margins from higher ASP and favourable USDMYR due to the current COVID-19 pandemic which enforces higher hygiene standards. Our target prices for glove stocks are based on +1.5SD to +2.0SD which is to better reflect rubber gloves players’ prospects in anticipation of restocking activities, resilient earnings and their constant evolution and progress to increase earnings. We have OUTPERFORM calls on HARTA (OP; TP: RM8.00); KOSSAN (OP; TP: RM5.90) SUPERMX (OP; TP: RM2.00) and TOPGLOV (MP; TP: RM6.50). Our Top Pick for the sector is HARTA (OP; TP: RM8.00).
Technology (Overweight). Moving into 2QCY20, pockets of opportunity have emerged after stocks took a beating in the wake of the novel coronavirus outbreak. While there is valid concern for disruption in both chip production and demand in China and neighbouring countries, we believe that the general trend for the technology sector is still pointing towards positive growth, albeit temporarily disrupted. We choose to take a positive view as valuations are trading at a steep discount from the peak while fundamentals remain intact. From the recent analyst briefings with tech companies, we are getting a general sense that orders are not being cancelled but back-loaded. This could translate into a late recovery in 2020, as seen in 2019. Hence, we believe that 1QCY20 earnings performance which is likely to be soft could provide the opportunity to re-position for a recovery in 2HCY20. We like automotive-centric players as they offer more room for growth compared with smartphones. Our top picks are MPI (OP; RM13.30), KESM (OP; RM10.20) and D&O (OP; RM0.91).
Construction (Overweight). A cloud of uncertainties emanating from a gloomy economic backdrop has blurred the construction sector outlook. In essence, sentiment on construction stocks will remain under siege from the Covid-19 spill-over effects and possible delays in the revival of mega infrastructure projects. The KLCON Index reacted by falling 37.2% YTD (until 20 March 2020), thus reversing last year’s gain of 34.2%. With investor confidence battered badly and given poor earnings visibility, we have switched our valuation methodology to PBV. During the 2008/2009 Global Financial Crisis (GFC), the construction sector was then trading between –2SD and –1SD below the historical PBV mean for approximately three months. In comparison, the KLCON Index is currently trading at -2SD below its mean, suggesting limited downside risks.After attaching basement PBV multiples at -2.5SD and -1.0SD below their mean levels, our revised target prices indicate positive returns to be made by investors in the medium term as valuations are expected to revert to normalcy post-crisis. From a fundamental perspective, our top stock picks are GAMUDA (OP; TP: RM3.18), SUNCON (OP; TP: RM1.80) and HSL (OP; TP: RM1.37). In addition, trading-oriented investors can consider WCT (OP; TP: RM0.47) and KIMLUN (OP; TP: RM1.25) as potential rebound plays from oversold territories. Upgrade sector call to tactical OVERWEIGHT on valuation grounds.
Property (Overweight). Already grappling with an oversupply imbalance, the property sector is expected to be hit harder now by the deteriorating economic conditions and evaporating consumer confidence. In the midst of the perfect storm, property developers will find it challenging to clear their inventory of completed stocks and achieve forward sales targets. Reflecting the bearish sentiment, the KLPRP Index extended its losses this year, down 37.7% YTD (as of 20 Mar 2020) compared with the benchmark index’s decline of 18.0%. To get a sense on valuation levels during a market meltdown, we looked back to 2008/2009 when global equities crashed in the wake of the global financial crisis. Back then, the property sector hovered between –1.5SD and –1SD below its historical PBV mean for approximately 11 months. After the recent intense sell-off, the KLPRP Index has overshot to trade at the distressed level of -2.5SD below its mean currently, suggesting a relief rebound is probable. Even after applying basement PBV multiples at –2.5SD to –1SD below their mean levels to factor in the challenging outlook, our revised target prices suggest there are potential upsides while valuations are poised to revert to normalcy post crisis, as was the case in the past. From a valuation perspective, we are retaining our tactical OVERWEIGHT sector call with our top picks being SIMEPROP (OP; TP: RM0.88) and IOIPG (OP; TP: RM1.21). For trading-oriented investors, we recommend UEMS (OP; TP: RM0.58) and SPSETIA (OP; TP: RM0.86) as potential rebound plays from oversold positions.
Media (Overweight). We maintain our recently upgraded OVERWEIGHT call (from NEUTRAL) on the media sector. For the past few quarters, the sector was bogged down by declining revenue prospects amidst the ongoing digitalisation of advertising medias dampening the demand for traditional media channels (i.e. television, physical print publications). We do not discount that the Covid-19 pandemic and slowing global economic activity could dampen sentiment further. Concurrently, overhead costs could surpass dwindling top-lines for most players. That being said, we believe that media players have finally found the sweet spot in managing operating expenses through painful restructuring exercises (i.e. manpower rationalisation) while growing their presence in digital spaces and expanding on their integrated marketing solution offerings. We have mostly trimmed our earnings assumptions and valuations with this piece and are still convinced of the value to be had within this industry. MEDIAC (OP; TP: RM0.245) is our preferred pick for the sector, having its near-term earnings guarded by recent tax incentives while paying handsome dividend yields of c.9%.
Math: the only place where you have to figure out the ratio of yellow candy to blue candy when all you’re thinking about is eating them. 😀