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KL Trader Investment Research Articles

Author: kltrader   |   Latest post: Thu, 23 May 2019, 9:25 AM

 

Malaysia Strategy – 2019 Outlook

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Key market themes for 2019 are the government-linked companies (GLC) reform and Petronas monetization, according to Macquarie Equities Research (MQ Research) in their research report released yesterday (7 Jan). MQ Research highlighted their top stock picks, showing preference for discounted, yield resilient beta stocks over fully-valued defensives.

Read on for more information, and for MQ Research’s top picks.

Conclusion

  • Against a backdrop of sustained albeit decelerating global growth, Malaysia’s relative resilience is reinforced by positive emerging markets differentiators re current account surplus, contained FX vulnerabilities and sturdy national oil corporation (Petronas). Nonetheless, structural threats from de-globalisation and peak manufacturing mean the new government must expedite domestic institutional reforms to stimulate internal growth drivers and lift broad quality of governance, especially for the expansive GLCs sector (>50% of KLCI capitalisation). Related restructurings and regulatory clarity, with optimised leveraging of Petronas via higher dividends/stake rationalisations, will drive a market re-rating despite the challenging earnings growth outlook.

Impact

  • Macro - pressured, but resilient: Malaysia’s 2019 gross domestic product growth outlook is buffered by anticipated normalisation of commodity-specific supply shocks, fiscal stimulus via Petronas’ one-off RM30bn special dividend and mass consumption support from lower fuel and housing costs. Financial system indicators are robust, with ample Ringgit liquidity and external assets containing stresses relating to foreign portfolio outflows.
  • Reforms need to accelerate: with a historically trade/manufacturing-led economic growth model now structurally at risk, reforms aimed at lifting domestic competitiveness and productivity of non-tradable sectors are urgent. There is plenty of low hanging fruit re the discounted GLC space; regulatory clarity by itself would re-rate flagship stocks like Tenaga and Telekom. Fiscally-driven pressure on Petronas to monetise subsidiary stakes (convertible bonds most sensible) would also boost KLCI free-float.
  • Market, sector positioning: base case 12mth KLCI target is 1,775, +5.9% or 16x 2019E price-earnings ratio (PER) (market dividend yield is 3.5%). Delivery on GLC Reform, Petronas monetisation themes would put blue-sky bottom-up KLCI target of 1,889 (+13%, 17x PER) within reach, especially if overlaid with high-impact infrastructure stimulus (ECRL, water).

Outlook

  • Favoured Khazanah-GLCs are Tenaga, Telekom, Axiata and CIMB; for Petronas subsidiaries, MQ Research likes PChem and MISC. Re sectors, MQ Research favours banks (Maybank, RHB preferred over Public, HLBK), transport (AirAsia) and exporters (semicons Inari, Vitrox preferred over gloves). PGas, BAT, IHH and QL are (non-consensus) Underperform ratings.

Source: Macquarie Research - 8 Jan 2019

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