The cut in economic targets by the Govt reflects the challenges Malaysia faces as it balances between growth and fiscal prudence against an external backdrop of lower oil price and the US-China trade war. MoF’s 2019 GDP target of 4.9% is a Herculean task and our forecast is lower at 4.6%. Despite a flattish year for earnings in 2018 (-0.1%), growth in 2019 will remain uninspiring at 3.3%, below its post GFC CAGR of 7%. Still, we believe there are key themes to eyeball for 2019: East Malaysia, trade war opportunities, healthcare and Govt asset monetisation. Our KLCI target of 1,750 is based on 15.5x PE (-1SD).

Slower growth outlook. We project global growth to be a tad lower at 3.6% for 2019 (IMF: 3.7%) vs 3.7% in 2018, as most major economies experience slower growth. The trend is similar for Malaysia as we forecast slightly slower GDP at 4.6% for 2019 (2018: 4.7%) on back of (i) consumption normalisation post tax holiday, (ii) private investment deceleration from domestic and external uncertainties, (iii) reprioritisation of public spending and (iv) more gradual exports from continued US-China trade woes. Although MoF targets a 2019 budget deficit at -3.4% (2018: -3.7%), this would be lower at -2.9% if one-off factors were stripped out (i.e. tax refund and PETRONAS special dividend). Nevertheless, risk of credit rating downgrade may continue to persist in 2019. Despite our higher YoY inflation forecast of 2.0% (2018: 1.3%), we expect BNM to extend its policy rate pause into 2019.

No walk in the park. The cut in several key economic targets during the 11MP MTR (e.g. GDP and budget deficit) reflects the challenges Malaysia faces as it walks a thin rope, balancing between growth and fiscal prudence against an external backdrop of lower oil price and the US-China trade war. In our view, MoF’s 2019 GDP target of 4.9% is a Herculean task while the weak ringgit will make it anything but a walk in the park for corporate Malaysia. Post GE14, new (perhaps socialist leaning) policies have been introduced, the top brass at several GLCs/GLICs were replaced and institutional reforms are on the drive. While more changes may continue to unfold, we are hopeful for some stability on this front by 2H19. Although we project KLCI earnings to remain flat this year (-0.1%), growth will continue to remain subpar at 3.3% for 2019, below its post-GFC CAGR of 7%.

Key themes for 2019. Despite the uncertain outlook, we highlight 4 key themes that may come to play in 2019. Firstly, we envisage a greater emphasis on Sabah and Sarawak by the new Government which may play in favour to home grown “local state companies” in the construction and O&G space. Secondly, we see opportunities for tech, EMS and furniture resulting from the US-China trade war. Our third theme focuses on higher healthcare allocation (think Edgenta) and the B40HPF scheme (benefiting private hospitals). Lastly, the Government asset monetisation theme should remain topical in 2019. In this regard, we have BUY ratings on the following Khazanah owned companies: Tenaga, TIME and Edgenta (all in our top picks).

KLCI target of 1,750. Although the KLCI’s PE is below -1.5SD from mean, this comes on back of lacklustre earnings growth. Our KLCI target of 1,750 is based on 15.5x PE (-1SD) tagged to 2019 EPS. While the investment mood is sombre, we think (albeit anecdotally) that there is sufficient domestic liquidity sitting on the side lines ready to be deployed should valuations approach bottoming levels. To be pragmatic, the downside risk to our KLCI target is 1,580 after taking into account possible earnings shortfall and PE valuation at -1.5SD (the bottom level in the past 5 years). For investment strategy, we favour stock selection as opposed to broader base sector allocation (our only OVERWEIGHT sectors are healthcare and power). Our top picks are Tenaga, RHB, Sunway, TIME, KPJ, BAuto, Edgenta, Taliworks, Frontken and FPI.

Source: Hong Leong Investment Bank Research - 25 Dec 2018