• Stocks were lacklustre coming into 4Q. Malaysia stocks were generally lower in September as large capitalisation stocks were pushed back on external-related risks. The KLCI declined 4% in the last month of 3Q2021 versus a significant gain of 6% seen in August. On YTD basis the KLCI remains a major underperformer versus the region and is down by 6.3% for the year. Coming into 4Q, investors remain lukewarm to the prospects of the traditional yearend euphoria.
• Corporate profit growth slowing amid easing in global economy. There are emerging signs that corporate profitability is facing headwinds in the coming quarters. Producer costs and consumer prices are seeing large divergences this year, suggesting that profit margins for some sectors are coming under pressure. The latest in global economy GDP growth, meanwhile is expected to grow at 4.9% in 2022 versus 4.4% estimated earlier according to the IMF, easing the margin pressure somewhat. We advocate exposure to the commodity sector as a way to mitigate businesses with significant margin compression.
• Foreign flows turning but still unconvincing. Malaysia has been at the end of foreign selling the past 2 years and the outflow has not abated despite inflows returning to the Asian region during the early part of this year. In August, the market saw net inflows of RM1.0bn, and this was followed by another RM740m in September. It is too early to predict that a revival in foreign flows is on the horizon as the KLCI is seeing an estimated growth of only 5.2% yoy for FY22; while the Hijrah Shariah (ex-banks) is expected to decline by 10.7% yoy.
• We remain positive on consumer-related themes, particularly commodities. We think that the headline KLCI may continue to disappoint as large capitalisation stocks come under selling pressure from local institutions as the year end approaches and lack of cyclical-based stocks. With this in view, we have recalibrated our KLCI year-end target to 1,650 from 1,700 – using long term average PE of 16.5x as our basis. We continue to favour plantation on unrelenting earnings momentum, oil & gas on recovery, plus trading opportunities on glove and construction stocks among others. Our tech recommendation is slated for longer term, as semiconductor stocks weakness may persist on cyclical peak demand concern, but global 5G acceleration provides support for certain sub-sectors.

Source: BIMB Securities Research - 6 Oct 2021

• Downturn in Malaysia manufacturing activities eases in September
• Global manufacturing PMI stays at 54.1 in September
• Supply constraints are still limiting growth in industry
• Headline PMIs fell in many parts of the world
• Disruption to industry from Delta outbreaks in emerging Asia eased

Downturn in Malaysia manufacturing activities eases in September

The headline IHS Markit Malaysia manufacturing purchasing managers' Index (PMI), a composite single-figure indicator of manufacturing performance, rose to 48.1 in September from 43.4 in August, showing downturn in Malaysian manufacturing sector eases in September.

Businesses signalled that the Malaysian manufacturing sector continued to be disrupted by the latest wave of COVID-19 cases in September, albeit to a lesser extent than in August. Pandemic fighting measures meant that both output volumes and new order inflows continued to be scaled back in September, though rates of decline both eased to the softest in four months as some of these restrictions were eased. Foreign demand for Malaysian manufactured goods also moderated, but at a softer pace than total new orders. The reduction in new export orders was only mild, and eased to the softest since May. Malaysian manufacturers reported that employment fell slightly for the second month in a row in September as businesses indicated difficulties in taking on foreign workers amid strict border restrictions. The lack of productive capacity, coupled with sustained material shortages contributed to a survey record increase in backlogs of work. Goods producers continued to report significant supply chain delays during September. Supplier delivery times lengthened at a robust rate once again as containment measures restricted supply of freight capacity and raw materials, exacerbating existing delays and shortages. Despite restrictions on the economy and ongoing supply disruption, manufacturers were increasingly confident that output would rise over the coming year, citing hopes that the end of the pandemic would encourage new projects to begin and aid a broad-based recovery in market demand. As a result, the degree of optimism reached the highest since April.

Outlook. COVID-19 cases continued to disrupt manufacturing in Malaysia last month, but the latest survey by IHS Markit showed that things may be looking up for the sector. According to IHS Markit’s COVID-19 Containment Index, virus-fighting restrictions have been rolled back in Malaysia to their lowest since April, facilitating production and helping ease the downturn in demand. Vaccination progress has improved and virus cases were on a downward trend through September, helping drive renewed optimism about the economic outlook and driving business confidence to the highest since April. The survey data therefore add to signs that the economy has turned a corner at the end of the third quarter following a steep downturn, and the improvements in the survey’s future expectations and order book indicators point to growth picking up in coming months. The historical relationship between the PMI and official statistics suggests that the recent downturn in GDP will have eased markedly at the end of 3Q21, and the rise in the latest PMI bodes well for improving momentum in coming months. Meanwhile, gradual relaxation of containment measures for some states during the month and year-ago low base effects bolstered the export growth last month. Exports expanded at a faster pace by 18.4% yoy in Aug (Jul: +5.0%). The stronger growth in overall exports was mainly attributable to better growth in shipments for many products, especially manufactured goods. E&E exports registered a rebound and expanded by +6.8% yoy (Jul: -12.1%). The risk is still tilted to the upside as the exports will continue to post positive growth. In the upcoming months, the reopening of more economic sectors is expected to gradually result in a better performance for the country’s external trade.

Global manufacturing PMI stays at 54.1 in September

The global manufacturing PMI sent a positive signal in September with rough stability in the survey after a number of months in which the output index declined sharply. However, the survey still points to ongoing supply constraints weighing on the sector. The J.P. Morgan Global Manufacturing PMI posted 54.1 in September, unchanged from August's six-month low. The PMI has now signalled expansion for 15 successive months. Data broken down by sector showed that growth continued across the consumer, intermediate and investment goods industries. PMI readings ticked higher for the intermediate goods sector, was unchanged for consumer goods and edged lower in the investment goods category. The latter retained its position at the top of the growth rankings, however. Manufacturing production and new orders both rose for the fifteenth successive month in September, and to slightly better extents than during the prior survey month. New export business also continued to expand, although the rate of growth was unchanged from August's seven-month low. Efforts to raise production further were stymied by severe supply-chain and logistic disruptions. The past six months have seen supplier lead times lengthen to the greatest extents in the survey history. Although global manufacturing employment rose for the eleventh consecutive month, the rate of increase was the weakest since February. Supply disruptions and material shortages also fed through to higher prices in September.

Source: BIMB Securities Research - 4 Oct 2021

Weekly Economic Review

Last week’s highlights

• Ministry of Finance Malaysia (MOF) had released its 70th LAKSANA report
• Malaysia’s PPI local production rose by 11.3% in August 2021
• The FBM KLCI fell by 0.49% or 7.58 points for the week to settle at 1,524.48 points
• US PCE price index rose by 4.3% yoy in August, up from 4.2% in July
• Euro area annual inflation is expected to be 3.4% yoy in September
• Vietnam GDP contracted by 6.17% yoy in the 3Q21, the slowest quarter in two decades
• BOT kept the policy rate unchanged, while CNB, Colombia and Mexico hike
• Week Ahead Economic Review

MALAYSIA ECONOMY

According to the Ministry of Finance Malaysia (MOF) 70th LAKSANA report, under technical and digital adoption for SMEs and mid-tier companies (MTC) programs, a total of RM83.3m has been distributed to 13,884 recipients. For the SME digitalization grant, a total of RM102.62m has been disbursed to 36,111 SMEs. Under Indian Community Entrepreneur Development Scheme, a total of RM19.96m was disbursed to 818 eligible SMEs. For the Danajamin Prihatin Guarantee Scheme (DPGS), the total guarantees approved were RM2.015bn for 54 companies. Besides, a total of RM1.024bn had been channeled based on 2,770,340 claims to the front-liners as allowance. The Social Security Organization (SOCSO) has paid compensation of RM11.19m to workers infected with COVID-19 at work involving 15,036 cases as of September 18, 2021. The disbursed amount of wage subsidy 1.0 and 2.0 schemes stood at RM12.937bn and RM1.381bn. For wage subsidy 3.0 and 4.0, a totaled RM3.03bn and RM928 were channeled to the employers as of 17 September 2021.

Malaysia’s export growth accelerated to 18.4% yoy in August from RM80.8bn in August 2020 to RM95.6bn. The stronger export performance was underpinned by the lower base effect, sustained global demand, and narrowed negative output gap reflecting from relaxing COVID-19 containment measures. Meanwhile, imports growth moderated by 12.5% to RM74.2bn in August compared to 24.0% growth in the previous month. Trade balance recorded a surplus of RM21.4bn in August, an increase of 44.7% from RM14.8bn from a year ago.

The Producer Price Index (PPI) local production rose by 11.3% in August 2021, down from an 11.7% rise in the previous month. The performance was the seventh month of an increase in the inflation cost. The growth was driven by the rise in all sub-indexes except water supply: the mining index (51.8%); agriculture, forestry & fishing index (27.6%); manufacturing index (7.1%); electricity & gas supply (0.4%). Water supply slipped by -0.4% compared to a 1.3 % rise in July. Meanwhile, PPI by stage processing, the index of crude materials for further processing moderated from 35.8% to 30.9% in August 2021. The index of Intermediate materials, supplies & components increased by 11.2%. However, the finished goods recorded deflation of 1.3% in August, up from a 0.4% drop in July. From January to August 2021, producer inflation rose by 8.2% compared to the same period a year ago.

Source: BIMB Securities Research - 4 Oct 2021

• NAGA 2 secured a new short term contract from Petronas Carigali to drill 5 wells worth USD12.4m. This contract shall commence in Dec 2021 and expire in Apr 2022. DCR is estimated at USD70k/day which is largely similar to its other fleets.
• We expect more contract wins in near-term based on our FY22 utilisation rate of 70%. Currently, the company is tendering for 13 contracts with total bid value of RM1.8bn.
• We think current high oil price and the improving Covid-19 condition in the country will expedite the roll-out of new drilling projects. This should improve the sentiment towards the stock.
• Reiterate our BUY recommendation with TP of RM0.28 pegging 1x P/B to FY22F. As highlighted in our recent report, we are optimistic that Velesto is capable of recording sustainable profits over FY22-23F mainly due to its improved cost structure from the loss of NAGA 7, supported by recovery in offshore projects.

New contract for NAGA 2

Velesto’s NAGA 2 secured a new contract with Petronas Carigali to drill 5 wells with a contract value of USD12.4m. The contract is expected begin in Dec 2021 and it has the option to drill additional 1+1 wells at the end of contract expected in Apr 2022. Based on the assumption of 150 days (30 days/well), this implies DCR of USD83k/day. However, we estimate effective DCR is at USD70k/day as the estimated contract value includes other additional expenses such as mobilisation fees and procurement of other materials for the clients. This is largely similar to its current daily rate.

Working to replenish its orderbook

This is its third rig that has secured contract for 2022. NAGA 8 will be fully occupied for the whole year as it is contracted by Carigali Hess for drilling campaign at MTDJA whereas NAGA 4 is contracted by Sarawak Shell until mid-2022. Based on existing contracts, this implies utilisation rate of 30% for 2022. We expect it to secure more contracts in the near future based on our assumption of 70% utilisation rate. Its remaining tenderbook currently stands at RM1.8bn which comprises 5 short term local contracts, 3 long term local contracts and 5 foreign contracts.

Maintain BUY with unchanged TP RM0.28

Maintain BUY on Velesto with unchanged TP of RM0.28 pegging 1x P/B to FY22F. We think current high oil price and the improving Covid-19 condition in the country will expedite the roll-out of new drilling projects soon.

Source: BIMB Securities Research - 4 Oct 2021

• Exports reaccelerated to 18.4% yoy; Imports rose by 12.5% yoy in July
• Trade surplus widened to RM21.4bn
• Export growth returned to double-digit growth in August
• Import growth slowed but sustained double-digit growth for the seventh consecutive month
• Improving shipments to major trading partners
• Supply constraints hobble manufacturers and affect global exports
• Export to continue growth as reopening commences

Malaysia’s export growth accelerated to 18.4% yoy in August from RM80.8bn in August 2020 to RM95.6bn. Exports sustained positive growth for the twelfth straight month and up from July print of 5.0% yoy. The stronger export performance was underpinned by the lower base effect, sustained global demand and narrowed negative output gap reflecting from relaxing COVID-19 containment measures. Domestic export stood at RM79.1bn contributed 82.7% to the total exports, expanded by 18.7% yoy (Jul: +5.9%; Jun: +21.0%; May: +45.5%; Apr: +83.4%; Mar: +38.3%; Feb: +10.2%; Jan: +6.0%). The re-exports which were valued at RM16.5bn, surged by 16.7% yoy (July: +2.0%; Jun: +61.2%; May: +56.3%; Apr: +11.0%; Mar: +3.8%; Feb: +64.9%; Jan: +7.5%). Meanwhile, imports growth moderated by 12.5% to RM74.2bn in August compared to 24.0% growth in the previous month. Total trade rose by 15.7% to RM146.7bn, sustaining the seventh consecutive month of double-digit expansion. Trade balance recorded a surplus of RM21.4bn in August, an increase of 44.7% from RM14.8bn from a year ago.

However, on a month-on-month basis, total trade, exports and imports contracted by 6.1%, 1.8%, and 11.2%, respectively. Meanwhile, trade surplus expanded by 55.5% during the period.

For the first eight months of 2021, total trade amounted to RM1,406.8bn, an increase by 22.9% compared to the same period of 2020. Exports during the period totalled RM778.5bn, up by 24.9% and imports was valued at RM628.3bn, increasing by 20.4%. A trade surplus of RM150.2bn was recorded for the period, widened by 48.2% yoy.

Source: BIMB Securities Research - 29 Sept 2021

• The 12MP will cover the period from 2021 to 2025
• 3 Themes of the Twelfth Malaysia Plan
• 4 Policy Enablers of the Twelfth Malaysia Plan
• 14 Game Changers of the Twelfth Malaysia Plan
• Strengthening macroeconomic resilience for sustained growth.

The economic development of Malaysia is steered by the five-year development plans. The Plans have always sought to identify the possible challenges during the five years and provided creative short and medium-term policy and strategy solutions. The Plans have served well to set out the medium-term policy priorities of the nation, the role of the government in the implementation of the Plan as well as the opportunity space for the private sector. Malaysia began publishing its five-year development plan documents with the First Malaya Plan in 1956, while the First Malaysia Plan was launched in 1965, bringing the overall total to 14 development plans. The 12th Malaysia Plan (12MP) is the nation’s 14th five-year development plan.

The 12MP, which will cover the period from 2021 to 2025, aims to restore the momentum of economic growth and achieve long-term development goals as the country faces challenges of the COVID-19 pandemic. The 12MP, which contains various initiatives, is centred on nine main areas of focus, namely boosting economic growth; strengthen growth catalysts; improving the well-being of Malaysian families; strengthen public safety and order; eradicating hardcore poverty, and bridging the income gap. The Plan will be based on three themes, four policy enables and fourteen game changes emphasizing the economic, social, environment and governance aspects.

The 12MP is a medium- and long-term economic recovery plan to address the impact of the COVID-19 pandemic and to put the economy back to its long-term growth trajectory. Considering the current challenges, a holistic plan is designed to reform and embrace structural changes in the pandemic era. The 12MP is designed to achieve sustainable economic growth, focusing on equitable wealth distribution, the rakyat’s wellbeing and environmental sustainability. The Plan will be the final roadmap before entering a new phase, becoming a developed nation. The Plan will take into account current challenges and emerging medium and long-term structural issues and the Shared Prosperity Vision 2030, which are at the beginning of implementation. With the challenges faced during the recent recession, the economic landscape is changing toward digitalization and sustainability, especially embracing a circular economy. Hence, the 12MP is the platform to address these challenges so that it can be a foundation to accelerate growth, strengthen resilience and achieve the socio-economic agenda and ensure that the country is on course towards becoming a High-Income Advanced Nation.

Themes, catalytic policy enablers and game changers

Themes - The Government has designed three themes to help Malaysia stay ahead of the challenges and embracing with the structural changes. The three themes of the Twelfth Plan are resetting the economy; strengthening security, wellbeing and inclusivity; and advancing sustainability. These thrusts aim to comprehensively address the end-to-end needs of the rakyat and the nation.

Source: BIMB Securities Research - 28 Sept 2021