Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 10 Apr 2020, 5:09 PM


COVID-19: Funding the Stimulus - Stretching the limits

Author: kiasutrader   |  Publish date: Fri, 10 Apr 2020, 5:09 PM


● In terms of share of GDP, Malaysia's stimulus package is relatively large compared to other ASEAN economies, standing at 17.6% of GDP (SG: 12.0%; TH: 12.0%; ID: 2.5%).

● As the impact of COVID-19 pandemic is unprecedented, ASEAN countries haverelaxedtheirfiscaland monetaryruleswhile intend to finance their stimulus package almost entirely through domestic debt.

● Although it may have additional support measures should the pandemic situation worsens, hindering economic activities for a prolonged period, we view that the federal government has limited fiscal space. It leaves the government with little choice but to borrow more.

● Whilst retaining compliance to the three statutory debt limits, the government has an estimated remaining debt space of RM15.2b (1.0% of GDP) should the need for additional fiscal injection arise.

● Issuance of additional debt is feasible as the banking system has ample liquidity to absorb the debt (statutory agencies’ banking system deposits: RM78.2b, outstanding excess liquidity placed with BNM: RM156.0b, temporary BNM financing: RM30.6b).

● Lessons can be learned on how Singapore able to tap into its well-managed national reserves in times of emergency.

Malaysiahas issued a total ofRM260.0b (17.6% of GDP) stimulus packageto weather the economic damages arising fromthe COVID-19 pandemic

- RM20.0b: schemed to mitigate the impact of COVID-19, stimulate people-centric economic growth and foster quality investments.

- RM230.0b: out of total, RM128.0b will be used to protect and sustain the livelihood of the citizens, RM100.0b to provide breathing space to businesses and RM2.0b to stimulate the economy.

- RM10.0b: additional allocation provided to the Small & Medium Enterprises (SMEs) to help ease the financial strain and reassure that 66.2% of the labour force will remain employed.

- Overall, direct fiscal injection amounted to RM35.0b (2.4% of GDP) and is expected to be financed via government borrowings, lifting up the nation’s fiscal deficit to 5.6% (MoF: 4.7%; 2019: 3.4%) of GDP amid lower oil price and weak economic growth.

As a share of GDP, Malaysia’s stimulus package is larger compared to other major ASEAN economies

- Singapore: The government committed a fiscal injection worth SGD59.9b (USD42b or 12.0% of GDP), subsequently raising its fiscal deficit projection to 8.9% for this year. The stimulus includes tapping into its past reserves amounting to SGD21.0b (USD14.5b).

- Indonesia: The government has temporarily scrapped its fiscal rules, allowing Jokowi’s administration to exceed the legal limit of its budget deficit of 3.0%. The government has set asideafiscal stimulus worth IDR436.1t (USD26.4bor2.5% of GDP), raising its budget deficit forecast to 5.1% of GDP.A large chunk of thestimuluswillbefunded viaissuance of pandemic bonds together with IDR-denominated bonds and sukuk.

- Thailand: The government approved its third stimulus package totallingTHB1.9t (USD58bor12.0% of GDP),likelytoexceedits initial fiscal deficit target of 2.7% for this year. Of the total, THB1.0t will be financed through bond issuance (mostly THBdenominated), while remaining THB900b via central bank measures in the form of soft loans and corporate bonds purchases.

Source: Kenanga Research - 10 Apr 2020

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AEON Credit Service - FY20 Within Expectations

Author: kiasutrader   |  Publish date: Fri, 10 Apr 2020, 9:12 AM

FY20 CNP of RM274.4m (-20%) is within our estimate but full-year dividends of 31.5 sen missed target. We believe the on-going MCO will dampen prospects with lower consumer spending and repayments, with strong impact from its primary B40 customers. That said, the group is bolstered by a portfolio with strong asset quality (NPL: <2%) which could sustain the group until normalcy returns. Upgrade to MP (from UP) but cut our TP to RM8.80 on lower earnings and more conservative valuation (8.0x PER from 10.0x).

FY20 met expectations. FY20 core earnings of RM274.4m (excluding sukuk distributions) made up 103% and 98% of our and consensus’ estimates, respectively. Although the final interim dividend of 14.0 sen raised the total payment to 31.5 sen, it is still below our earlier anticipated 45.0 sen, owing to our overly-bullish payout assumption.

YoY, FY20 total income grew by 12% to RM1.42b mainly from gains in net interest income (NII +15%). This was helped by a larger base in gross financing receivables (+20%), mainly from key auto, motorcycle and personal financing segments. However, net interest margin was softer at 11.7% (-0.7ppt), likely skewed by a poorer receivable mix in line with the group’s total portfolio growth. More prudent impairments were made from MFRS 9 which saw an increase in provision by 46%. On top of less favourable cost-to-income ratio (CIR) of 40.8% (+2.4ppt) and credit charge ratio (CCR) of 4.9% (+0.8ppt), core earnings registered at RM274.4m (-20%). On other key metrics, non-performing loan (NPL) ratio remained stable at 1.92% (4QFY19: 2.04%) while net credit cost ratio was higher at 3.41% (4QFY19: 2.16%).

QoQ, 4QFY20 total income improved by 5%, but this was mainly on the back of higher operating income (possibly from higher bad debts recoveries) while net interest income remained stagnant. Thanks to lower impairment allowances (-23%), core net profit rose by 15% to RM80.1m.

Trying to catch a break. Throughout FY20, the group has been coping with poorer reported earnings owing to the more stringent requirements set by MFRS 9. Going forward, the group looks to face more hurdles due to the Covid-19 pandemic. Locally, the implemented movement control order (MCO) is likely to gag receivables growth at least in the first quarter. While AEONCR is a Non-Bank Credit provider and does not need to adhere to the six months moratorium, it has offered to allow a one-month deferment of payment for its customers. Nonetheless, with the economic landscape being strained, it is probable that the group’s NPL ratio could be stressed, albeit presently at a low base of below 2.0%. This is especially so given the group’s high B40 mix which we believe constitutes at least 50% of the group’s customer profile.

Post-results, we cut our FY21E earnings assumption by 14% mainly on the back of more cautious receivables growth and credit ratios. Nonetheless, this still translates to a 2% earnings growth against FY20 as we anticipate a softer 1HFY21 to be compensated by a recovery in 2HFY21. We also introduce our FY22E numbers.

Upgrade to MARKET PERFORM (from UNDERPERFORM) but with a lower TP of RM8.80 (from RM12.80). In addition to lower earnings assumptions, we also reduce our applied valuations from 10.0x (0.5SD below 3-year mean) to 8.0x FY21E PER (1.5SD below 3-year mean). Our more conservative valuation is premised on the severely constrained market environment and we also do not discount the possibility of the MCO being extended beyond April 2020, which could further dampen sentiment. However, with dividend yields of c.4% which we view as sustainable, we recommend accumulating on weakness, for yield seeking investors.

Risks to our call include: (i) higher/lower-than-expected cost ratios, (ii) better/weaker-than-expected financing receivable growth, (iii) better/weaker-than-expected asset quality, and (iv) worsening pandemic impact leading to prolonged countermeasures (i.e. prolonged or enhanced movement control order).

Source: Kenanga Research - 10 Apr 2020

Labels: AEONCR
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Daily Technical Highlights – (OMESTI, MUHIBAH)

Author: kiasutrader   |  Publish date: Fri, 10 Apr 2020, 9:12 AM

OMESTI (Not Rated)

  • Yesterday, OMESTI gained 8.5 sen (+18.28%) to close at RM0.550.
  • Chart-wise, the stock has broken above the 50 and 100-days SMAs yesterday, backed by higher-than-average trading volume.
  • Coupled with bullish signal from MACD indicator, we believe the stock could trend higher.
  • From here on, overhead resistance can be seen at RM0.610 (R1) and RM0.680 (R2).
  • Conversely, downside supports can be identified at RM0.430(S1) and RM0.360 (S2).

MUHIBAH (Not Rated)

  • Yesterday, MUHIBAH rose 11.50 sen (+12.99%) to close at RM1.00.
  • Chart-wise, the stock continued to trade above the 20-days SMA, supported by higher-than-average trading volume.
  • Coupled with bullish signal from MACD, we believe the stock could move higher.
  • Should buying momentum persist, overhead resistance is at RM1.29 (R1) and RM1.62 (R2).
  • Conversely, support levels can be identified at RM0.860 (S1) and RM0.750 (S2).

Source: Kenanga Research - 10 Apr 2020

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Daily technical highlights – (HARTA, SKPRES)

Author: kiasutrader   |  Publish date: Thu, 9 Apr 2020, 9:08 AM

HARTA (Not Rated)

  • HARTA gained 12.0 sen (+1.68%) to close at RM7.27 yesterday.
  • Chart-wise, the stock continued to trade well above all the key SMAs, backed by higher-than-average trading volume.
  • Coupled with bullish signal from MACD signal, we believe the stock could trend higher.
  • From here on, overhead resistance can be seen at RM7.50 (R1) and RM7.85 (R2).
  • Conversely, downside supports can be identified at RM6.65(S1) and RM6.35 (S2).

SKPRES (Not Rated)

  • Yesterday, SKPRES rose 5.50 sen (+6.21%) to close at RM0.940.
  • Chart-wise, the stock continued to closed higher after it break above the 20-days SMA on Tuesdays, supported by higher-thanaverage trading volume.
  • Coupled with bullish signal from MACD, we believe the stock could move higher.
  • Should buying momentum persist, overhead resistance is at RM1.10 (R1) and RM1.30 (R2).
  • Conversely, support levels can be identified at RM0.780 (S1) and RM0.650 (S2).

Source: Kenanga Research - 9 Apr 2020

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Indonesia Retail Sales - Remains on a downtrend in February amid escalating COVID-19 outbreak

Author: kiasutrader   |  Publish date: Thu, 9 Apr 2020, 9:06 AM

● Retail sales remained in a contraction for four straight months, declining by 0.8% YoY in February (Jan: -0.3%)

- Mainly attributable to a sharp fall of clothing (-40.4%; Jan: -27.5%) and cultural recreation (-16.8%; Jan: -3.2%).

● March’s retail sales estimate points towards deeper deterioration following the impact of worsening COVID-19 outbreak

- Real Sales Index (RSI) fell by 5.4% YoY, lowest since Oct 2011 weighed by a broad-based slowdown, led byapparel (-45.9%; Feb: -40.4%), other goods (-40.6%; Feb: 32.4%),and stationery & communication (-10.5%; Feb: -4.0%).

- This is in line with a deterioration in the consumer confidence index, which fell sharply by 8.6% YoY (Feb:-6.0%), lowest since Dec 2015 on the impact of the pandemic.

● Sluggish sales performance expected for the next 3 to 6 months amid a weak economic outlook

- 3-month Sales Expectation Index (SEI): fell sharply to 5.4% YoY (Jan: 0.4%).

- 6-month SEI: fell sharply by 6.6% YoY (Jan: 4.6%) signalling weak demand going forward.

● Inflationary pressure to rise in the next three months before it subsides

- 3-month Price Expectations Index (PEI): rose 12.4% YoY (Jan: 7.3%), highest in 23 months in line with fasting month and Eidul-Fitr festive period where demand for food and clothing would rise.

- 6-month PEI: deflationary (-1.0%; Jan: 2.5%), on the expectation of slowing economic growth and post-festive season normalisation.

● Retail sales are expected to worsen further

- With the surge in COVID-19 positive cases and deaths, the government might impose a lockdown soon. This wouldhamper the retail sales, which already in the fourth month of a contraction. The government has resisted the need to impose a city lockdown, citing such measures would hurt the poor.

- On the monetary front, we expect BI to stay put in the next Board of Governor meeting (April 14th) despite its ample room to lean towards a rate cut by another 25-50bps, as the probability seemed to be reduced due to weak Rupiah.

Source: Kenanga Research - 9 Apr 2020

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Malaysia Bond Flows - Largest outflow in 22 months as investor flocked to safe havens in March

Author: kiasutrader   |  Publish date: Wed, 8 Apr 2020, 9:22 AM

● Foreign investors retained as net sellers of Malaysia’s debt securities in March, pulling out funds at the fastest pace in 22 months (-RM12.3b; Feb: -RM8.1b)

- Total foreign holdings fell to a nine-month low (RM187.8b; Feb: RM200.1b), with its share in Malaysia’s total outstanding debt fell to 12.3% (Feb: 13.2%), the lowest since June 2019.

- Attributable to worsening COVID-19 situation and plunge in global oil price triggered by the price war between Saudi Arabia and Russia.

● Larger outflow was due to a net decrease in holdings of Malaysian Government Securities (MGS) and conventional Private Debt Securities (PDS)

- MGS (-RM12.5b;Feb:-RM7.1b): foreign holdings share of total MGS shifted down to 36.8% (Feb: 39.6%), a 10-month low.

- Conventional PDS (-RM0.21b; Feb: -RM0.17b): foreign holdings eased to a four-month low (4.4%; Feb: 4.5%).

● For the equity market, foreign fund outflows persisted for nine straight months in March

- Largest outflow in 22 months (-RM5.5b; Feb: -RM2.0b).

● Overall, the capital market registered a staggering RM17.8b (Feb: -RM10.1b) of net outflow in foreign funds, the largestsince the general election season back in May 2018.

● Debt market to endure further outflow in the near term as risk-off sentiment dominates

- The rush to safe havens is reflected in the US 10-year Treasury average yield which dropped by 64 basis points (bps) to a noteworthy 0.81% in March (it briefly touched an all-time low of 0.318% in overnight trading on 8 March), while the 10-year MGS average yield edged up by 25 bps to 3.18%, widening the average yield spread to 236 bps (Feb: 147 bps).

- Outflow to persist on COVID-19 fears, an imminent recession and plunge in oil price. Nonetheless, it will be slightly softened by a more severe pandemic situation in the US and dovishpolicystance adopted across major central banks. As such, Ringgit will remain volatile with a downward bias against the USD in the immediate term, before it ends the year at 4.30 (2019: 4.09).

- For now, BNM is expected to pause any further rate cuts, noting that it has already embarked on an aggressive monetary easing recently and that it may decide to save its leftover bullets for future needs.

Source: Kenanga Research - 8 Apr 2020

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