• The commencement of the Budi Madani cash assistance payments to eligible recipients will mark the start of the diesel subsidy rationalisation program, with the pump price of diesel at all retail stations in the Peninsular increasing to RM3.35 per litre, up by RM1.20 per litre, starting Monday, June 10, 2024.

• Rather than full abolishment of diesel subsidy, the Government will maintain a large chunk of the subsidy amount. This, coupled with other mitigation plan, will have minimal bearing to domestic consumption and contain the potential impact of inflationary price pressure.

• Conversely, it is expected to lift the government’s fiscal space to roll out infrastructure projects as outlined in Budget 2024. Hence, we expect more news flow for construction projects moving forward. This should provide support to recent construction sector rally as well as a boost to the laggard small-cap construction stocks and steel counters.

• We retain our FBMKLCI 2024 year-end target of 1,720 points.

After a prolonged debacle in establishing a proper subsidy mechanism, the government finally forged ahead with the rationalisation of diesel subsidies. Eligible recipients involving more than 30k individuals, farmers and smallholders will start receiving RM200/month under the Budi Madani cash assistance beginning 10th June 2024. In the larger scheme of thing, the government estimates 300k diesel vehicle owners in Peninsular Malaysia will be eligible for Budi Individu program, while 68k farmers, 8k livestock farmers and 34k small-scale aquaculture operators will be eligible under Budi Agri-Komoditi.

Refers to https://drive.google.com/file/d/1CLLIF_WU5hhmmmYqFZ-dFstDOuEABxLV/view?usp=sharing

For this round, the government targets to achieve RM4bn of savings or c.30% of amount that it spent on diesel subsidy in 2023, totaling to RM14.3bn. It is hoped that it will be further reduced to 50% when the mechanism is applied to Sabah and Sarawak. The savings amount will be generated from stopping leakages to (i) smuggling activities, (ii) ineligible commercial sector, and (iii) ineligible M40 and T20 citizens. This money will then be channeled towards upgrading infrastructure such as roads and schools as well as higher allocation towards health sector services.

Considering the sharp rise in subsidised diesel usage of around 70% growth to 10.8bn litres in 2023 from 6.1bn litres in 2019, it is suspected that the first two categories – smugglers and commercial sectors – were the key drivers contributing to this, as the gap between commercial and subsidised price is getting wider amidst higher oil price environment post COVID-19. Intuitively, higher portion of savings would be generated from stopping leakages to these segments rather than from the affected citizens.

Given that the government is likely to maintain a large chunk of its diesel subsidy payment, we expect minimal impact to domestic consumption at this juncture. Logistic players, hawkers and small traders that are part of recipients of subsidised diesel are also expected to maintain the price of goods or services. Meanwhile the government, through Kementerian Perdagangan Dalam Negeri (KPDN), will continue to intensify operations to curb profiteering in order to keep inflation in check.

Definitely, there will be some deserving households or business that may be left out from this, for some reasons, posing risk for price increase for some goods and services. However, we think it will involve only a minority, if not in isolated cases.

With regards to potentially higher operating cost as a direct repercussion from higher diesel price, we gathered most companies under our coverage are not likely to be impacted as they are not eligible for subsidised diesel from the beginning and have been paying market rate all this while.

On the flipside, we are positive with this measure particularly as it would provide more fiscal headroom for the government to implement its planned development expenditure project. To recap, the government has budgeted RM96.5bn for development expenditure in Budget 2024 including for (i) reinstatement of five LRT3 stations (RM4.7bn), (ii) Penang LRT (RM10bn), (iii) flood mitigation projects (RM11.8bn), (iv) Pan Borneo Sabah Highway Phase 1B (RM15.7bn), and (v) Sarawak-Sabah Link Road (SSLR) (RM7.4bn).

The rollout of these projects should bode well for construction stocks particularly to small-cap stocks which have been a laggard relatively to large-cap stocks. To a certain extent, this would also benefit steel counters as local steel producers are supplying its products largely towards the construction sector rather than industrial application.

For stocks under coverage, Gabungan AQRS (BUY, TP: RM0.49) is one of the beneficiaries from the government’s pump priming measures. Note that it should benefit from three fronts: 1) its involvement in the LRT3 project with the revived 5 stations located along its current project route, 2) its active participation in government-related projects such as schools, etc., and 3) its 49%-owned associate company, SEDCO Precast Sdn Bhd, which is expected to benefit from infrastructure projects in Sabah. Notably, the stock is among our 12 top pick stocks for 2H24 (see Table 4).

On the other hand, Petdag is the largest loser from subsidy rationalisation plan as the company has previously indirectly benefitted from higher subsidised diesel sales volume. The smaller subsidised diesel usage anticipated ahead would translate into lower sales volume moving forward. Nonetheless, the market has discounted this into the stock price and we currently have a HOLD call on the stock with TP RM19.10.

Overall, we expect positive momentum in local stock market to continue although a healthy correction is not entirely unexpected. In the near term, the local bellwether may consolidate as investors engage in profit-taking activities before exploring opportunities in other lagging sectors. All in, we maintain our year-end 2024 target of 1,720 points, which is less than 10% away from the current level.

Source: BIMB Securities Research - 10 Jun 2024