Government has finalised the petrol subsidy scheme, limiting it to Bantuan Sara Hidup recipients in Peninsular Malaysia who qualify based on car engine or age of vehicles. The subsidy scheme will begin on 1st Jan 2020. This allocation of pump price subsidy is more targeted vs the current blanket approach; expected allocation anticipated to be RM785mn vs RM2bn allocated during Budget 2019. With implementation taking place only in 2020, we cut 2019 CPI to 0.7% (from 1.0%) and introduce 2020 at 1.9%. From an equity sectorial perspective, there should be minimal impact to Pos, PetDag and autos but broadly negative for the consumer sector (from blanket subsidy to target subsidy).

NEWSBREAK

New petrol subsidy scheme. The Government’s new petrol subsidy scheme has been finalised. Under the plan, RON95 petrol price will be maintained at RM2.08/litre until 31st Dec 2019. Starting 2020, RON95 petrol price will float in a gradual manner until it is in line with international market prices. Should RON95 petrol price fall below RM2.08/litre, the Government will not subsidies the petrol price. In Sabah, Sarawak and WP Labuan, petrol price will be maintained at RM2.08/litre.

Target group. Bantuan Sara Hidup (BSH) recipients in Peninsular Malaysia who have registered cars or motorcycles in the qualifying category (Cars: engine <= 1600cc or >1600cc and 10 years or older. Motorcycle: engine <=150cc or >150cc and 7 years or older). This is expected to benefit 2.8mn people, with an allocation of RM65.4million a month (annual: RM784.8mn).

Mechanism. The petrol subsidy will be credited into the bank account on 1Q20 with 4 months’ worth of subsidy (Jan-Apr 2020). For car owners, the recipient will get RM120 (RM30/month for 100 litres) and motorcycle owners will receive RM48 (RM12/month for 40 litres).

HLIB’s VIEW

A targeted approach. The expected allocation of petrol price subsidy is more targeted instead of the current blanket subsidy, enhancing government spending efficiency. The expected total allocation is anticipated to amount to RM784.8m, much lower compared to the initial RM2bn allocation set during Budget 2019. In terms of CPI, following the implementation date in Jan 2020, we downgrade our 2019 CPI forecast to +0.7% YoY (previous: +1.0% YoY) and introduce our 2020 CPI forecast at 1.9% YoY, premised on the full year average assumption of Brent oil price at USD55- 60/barrel and USD/MYR at 4.20-4.30.

Sectorial impact. From an equity sectorial standpoint, migration towards this new petrol subsidy scheme may increase transport related costs YoY for businesses in 2020 should pump prices be above RM2.08/litre. For the logistics sector, we gather from Pos Malaysia (SELL, TP: RM1.29) that fuel cost only makes up c.2% of its total courier and postal services cost. On the auto sector, we do not expect this to have a significant impact TIV in 2020; our auto analyst deduces that the incremental cost to drivers could be <RM50/month (based on RM0.30 price increase per litre and 40 litres of fuel consumption per week). For Petronas Dagangan (HOLD, TP: RM23.01), there may be (i) a slight negative knee-jerk reaction to volume, but this is expected to be temporary and (ii) positive from a cash flow standpoint (i.e. receivables) as current blanket subsidies take c.2 months to be paid. Lastly, the migration to this targeted subsidy is broadly negative for the consumer sector as this is a change away from a blanket subsidy; potentially reducing total discretionary income should pump prices be above RM2.08/litre.

Source: Hong Leong Investment Bank Research - 8 Oct 2019