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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Tue, 22 Aug 2017, 09:42 AM

 

2016 Budget Recalibration - Still Market-Neutral

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With the exception of telco sector, the 2016 Budget Recalibration is fairly neutral to the local market. Despite the uncertainties in the telco sector, we reckon that TM (OP, TP: RM7.00) and AXIATA (OP, TP: RM6.30) are likely to be less affected in view of the former’s fixed-line operations while the latter can count on its hefty overseas contribution. With some pro-growth measures, we reckon the recalibration will benefit selective players in Consumer and Construction sectors with OLDTOWN (OP, TP: RM1.76) and KIMLUN (OP, TP: RM2.05) as our top picks. The recent reduction in SRR and the commitment of the Government to ensure liquidity in the financial system are likely to benefit fixed-income like equity investment such as PAVREIT (TP: RM1.68), SUNREIT (TP: RM1.73) and BJTOTO (TP: RM3.56). With the underlying trends of strengthening Ringgit and Crude oil prices, we sense a change in investment strategy. The combination of these trends has caused a series of profit-taking activities in export-driven counters, especially glove makers and emerging trading interest in Oil & Gas stocks. Hence, a short-term rebound play on Oil & Gas counters, especially those trading near trough valuations and having high correlation to oil prices such as SKPETRO (OP, TP: RM2.38), ALAM (UP, TP: RM0.32), COASTAL (MP, TP: RM1.99) and PERISAI (MP, TP: RM0.28) seems feasible. While our index target of 1,755 (@ 19.4x/17.9x FY16F/FY17F PER) remains unchanged, we may re-look at this index target pending forthcoming 4QCY15 results reporting season and further details announcement for the issue of redistributing and bidding process of telco spectrum.

2016 Budget Recalibration. In view of the underlying market uncertainty and volatility as well as challenging economy conditions, Prime Minister Dato' Sri Najib Razak (PM) has made a special address yesterday to reveal Government’s action in recalibrating and restructuring several economic measures, particularly with regard to the 2016 Budget. These measures are mainly centred on two (2) main pillars: - (i) to ensure the economy remains on a strong growth trajectory and (ii) to protect and safeguard the welfare and wellbeing of the rakyat. These prudent measures are expected to save RM9b in operating expenditure (RM4b) and development expenditure (RM5b). Hence, we understand that the Government is committed and able to achieve a fiscal deficit target of 3.2%/3.1% to GDP for 2015/16 despite lower oil revenue arising from lower oil prices (the assumption for average Dated Brent crude oil price has also revised lower to USD30-35/barrel as opposed to the assumption of USD48/barrel during the tabling of the 2016 Budget). We reckon that this is a fair assumption. Recall that we believe Brent Crude Oil is poised to bottom between USD25 and USD30 per barrel as per our Monte Carlo Simulation Study. As of end-2015, our simulation model also suggests that Brent Crude Oil is likely to trade with an average price of USD38/barrel in 2016 (see Figure 1). Moreover, with the recent move of Russia officials to initiate talk with OPEC led by Saudi Arabia on production cut, we do not rule out the possibility of oil prices to rebounding above USD50/bbl in 2H16 premising on potential supply demand rebalance should the negotiation goes well. At the same time, we also see the commitment of the Government to maintain the budget deficit target as another main reason for the recent appreciation of Ringgit against US dollar (despite bottoming of oil price). Of course, it is still too early to draw such a conclusion as potential hikes in US interest rate could put pressure on the global currencies. Nonetheless, from Figure 3 & 4, as the return of a carry trade pair of long Ringgit and Short US dollar has generated positive return since early- 2016 as opposed to wide losses in the year of 2015. Besides, Ringgit has also broken its uptrend channel of late, indicating more room for further retracement (see Figure 5). This combination will act as rerating catalyst for foreign inflow if and when proven sustainable. Thus far, we have seen a total net equity outflow of RM1.7b since early-2016. However, foreign flow has turned positive to net buying since 22/01/16 with accumulated RM645.5m since then.

Wind of change? The combination of these recent developments has caused a series of profit-taking activities in exportdriven counters, especially glove makers and emerging trading interest in Oil & Gas stocks. Should the above-mentioned observations are proven sustainable, we believe investors will start to accumulate Oil & Gas counters which are already at trough valuations, especially stocks with high correlation to oil prices such as SKPETRO (OP, TP: RM2.38), ALAM (UP, TP: RM0.32), COASTAL (MP, TP: RM1.99) and PERISAI (MP, TP: RM0.28).

Growth target lower ... While the Government expects the local economy to grow 5% in 2015, the 2016 forecast of GDP growth forecast is revised lower to 4%-4.5%. This is not a surprise as we have pointed out in our latest Investment Strategy report that we have yet to see meaningful earnings catalysts and we have also been revising down our FY16F earnings estimates from 7.4% in late-2014 to 3.9% in early-2016. As such, the official revision in GDP growth has no major impact to our FY16F/FY17F earnings estimates of 3.9%/8.1%. Nonetheless, we shall review our earnings growth estimates after the forthcoming 4QCY15 results reporting season.

... but the Government will continue to stimulate growth. In the special address, PM also highlighted that Bank Negara Malaysia (BNM) will continue to maintain an accommodative monetary policy and interest rate at a level that supports domestic economic activity as well as ensure sufficient liquidity in the financial system. This stance is reflected in the recent move of reduction in statutory reserve requirement (SRR) from 4% to 3.5%. As such, our economist believes that interest rate is likely to stay pat despite the Fed initiating its tightening cycle. Besides, such move has also driven Government papers' yields lower, which can be a piece of good news to fixed-income like equity investments such as MREITs and highyielding stocks. Among these stocks, we have OUTPERFORM calls on PAVREIT (TP: RM1.68), SUNREIT (TP: RM1.73) and BJTOTO (TP: RM3.56).

In an effort to increase private consumption, Government has also decided to reduce the employees’ contribution to the Employees Provident Fund (EPF) by 3% (from 11% to 8%) beginning March 2016 to December 2017 while the contribution by employers will remain unchanged. This measure is expected to increase private consumption expenditure by RM8b a year. On a separate measure, the Government will provide a special tax relief of RM2,000 to individual taxpayers with a monthly income of RM8,000 or below for the year of assessment 2015. We understand that the Government will forego revenue of RM350m under this measure but it will provide individual tax savings of up to RM475 per pax per annum for two (2) million taxpayers.

We believe these moves will benefit consumer sector in general. Consumer F&B sub-sector will continue to be a safe-haven in this tough and rough investment environment. Consumer retail sub-sector, on the other hand, can be a dark horse as we approach the one-year anniversary of GST implementation. Thus far, we have OLDTOWN (OP, TP: RM1.76) as our top-pick while others OUTPERFORM calls include CARLSBG (TP: RM13.86), DLADY (TP: RM58.51) and GAB (TP: RM15.36).

With regard to development expenditure, as expected, focus will be given to projects and programmes that are rakyatcentric, as well as with higher multiplier effect and low import content. Physical projects that will be prioritised include construction of affordable houses, hospitals, schools, roads and public transport as well as security. Besides, the Government remains committed to achieving the targeted private investment totalling RM215b this year by implementing major projects such as Mass Rapid Transit (MRT) and Light Railway Transit (LRT), Pan-Borneo Highway, Malaysian Vision Valley, Cyber City Centre, RAPID Pengerang and High-Speed Rail. This has reinforced our Top-Pick call of KIMLUN (OP, TP: RM2.05) in the construction sector. Under such construction sector landscape, we also reckon that MITRA (OP, TP: RM1.63) and MUHIBAH (OP, TP: RM2.79) could also be potential beneficiaries as well.

Telcos the losers? Nonetheless, in the efforts to enhance the efficiency and amount of tax collection, the Government will optimise the revenue from the telecommunication spectrum through a redistribution and bidding process that will be implemented soon. This announcement, however, has posed uncertainties to market as details are unknown, prompting investors to sell telco stocks during the afternoon trading session. We share the same view. While the details of the plan are yet to be unveiled, the latest decision of the authority suggested that operators may need to allocate more funds to retain spectrums. Thus, in view of the hefty funds required ahead, we scaled down our fairly neutral view on the sector operators’ prospect. Although we make no changes to all our telco companies’ FY15-FY16 earnings estimate, we have trimmed all our celcos’ target prices as well as their standard deviation level by 1.0x to reflect the latest change in government policy.

All told, despite the uncertainties in the telco sector, the 2016 Budget Recalibration is fairly neutral to the local market. With some pro-growth measures, we reckon the recalibration will benefit selective players in Consumer and Construction sectors with OLDTOWN (OP, TP: RM1.76) and KIMLUN (OP, TP: RM2.05) as our top picks. The recent reduction in SRR and the commitment of the Government to ensure liquidity in the financial system are likely to benefit fixed-income like equity investment such as PAVREIT (TP: RM1.68), SUNREIT (TP: RM1.73) and BJTOTO (TP: RM3.56). With the underlying trends of strengthening Ringgit and Crude oil prices, we sense a change in investment strategy. The combination of these trends has caused a series of profit-taking activities in export-driven counters, especially glove makers and emerging trading interest in Oil & Gas stocks. Hence, a short-term rebound play on Oil & Gas counters, especially those trading near trough valuations and having high correlation to oil prices such as SKPETRO (OP, TP: RM2.38), ALAM (UP, TP: RM0.32), COASTAL (MP, TP: RM1.99) and PERISAI (MP, TP: RM0.28) seems feasible. While our index target of 1,755 (@ 19.4x/17.9x FY16F/FY17F PER) remains unchanged, we may re-look at this index target pending forthcoming 4QCY15 results reporting season and further details announcement for the issue of redistributing and bidding process of telco spectrum. 

Source: Kenanga Research - 29 Jan 2016

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