“Covid-19 stimulus” of RM20bn (1.3% of GDP) raises the 2020 deficit target from -3.2% to -3.4%, which we feel is both attainable and necessary. MoF also lowered its 2020 GDP forecast from 4.8% to 3.2-4.2%. While our forecast of 4.1% is within MoF’s range, we flag downside risk should the episodes of Covid-19 and domestic political uncertainty prolong. This stimulus may provide a near term market reprieve, drawing some comfort that governance is still in place despite the absence of a Cabinet. Overall, the stimulus would aid tourism and consumer related sectors (i.e. REITs, gaming and airlines) but is negative for MAHB (discounts offered). Maintain KLCI target of 1,600.

Stimulus to combat Covid-19. Yesterday, the government announced a fiscal stimulus package amounting to RM20bn (1.3% of GDP) to mitigate the impact of Covid-19 on the economy; this was above our expectation of RM10bn. Nevertheless, its 2020 revised fiscal deficit projection only increased to -3.4% of GDP from -3.2% which implies that not all the outlay will come from the government’s coffers. Additional federal government expenditure and revenue measures only amounted to RM3.5bn (small infrastructure projects: RM2bn, other initiatives including tax measures: RM1.5bn). As such we opine that the -3.4% fiscal deficit target is attainable and necessary given the onslaught of Covid-19 on the economy.

2020 GDP projection lowered. The government has also revised down its 2020 GDP projection to 3.2-4.2% (previous: 4.8%), with expectation that this RM20bn stimulus package will enable the Malaysian economy to reach the highest point of the range. Our GDP projection of 4.1% sits within MoF’s forecast range. Nevertheless, there is downside risk to our forecast should (i) Covid-2019 become more persistent and prolonged beyond 1Q20 and (ii) recent political uncertainty could leave a protracted impact on the economy.

Cut on the cards. While the number of cases has been declining in China, the rising outbreaks in Italy, South Korea, and the Middle East have led to increasing concerns of a global pandemic. This could lead to further disruption to global manufacturing and trading system with prolonged impact to the global economy. Hence, as global infections rise and domestic political uncertainty pervades Malaysia, we expect BNM to reduce the OPR by -25bps in 1H20.

Possible market reprieve. Since the Covid-19 outbreak (which happened slightly before the Lunar New Year), KLCI has declined by -4.6%; arguably this was also exacerbated by the recent political fiasco. We reckon that this “Covid-19 stimulus” may provide a short term reprieve to the market as (i) the stipulated sum of RM20bn is higher than market expectations of RM10-15bn and (ii) it provides some comfort that governance is still in place despite the absence of a Cabinet. From a sectorial perspective, the stimulus seems to be largely aiding the tourism and consumer related sectors; i.e. REITs, gaming and airlines.

Consumption support. Both the employees’ EPF contribution rate cut by -4ppts and additional BR1M allowance (RM100) would potentially increase household disposable income by up to RM10.4bn (RM10bn from EPF cut + RM0.421bn from others). Assuming a 40% adoption rate in EPF contribution cut (similar to 2016) and high marginal propensity to consume of 80%, this could provide support to consumption growth by +0.4ppt. While we are UNDERWEIGHT on the consumer sector, we like Focus Point (BUY, TP: RM0.85) which should see growth driven by its F&B segment.

Domestic tourism boost to aid Genting. Efforts to encourage domestic tourism could payoff given people’s reluctance to travel abroad, which may lead to domestic holiday substitution (provided Covid-19 cases do not accelerate locally). This could help cushion the fall in visitors to Genting Highlands; management shared that visitors fell -17% YoY in Feb. However we prefer Genting (BUY, TP: RM6.17), which trades at a 10-year low, as opposed to GenM (HOLD, TP: RM3.13)

Still positive on REITs. For REITs, the 15% electricity bill discount will help reduce operating cost, while the 6% service tax exemption may aid hotel demand. However, these positives may be partially offset by the Government’s moral suasion for them to offer hotel discounts and lower shopping mall rent. For REIT’s with mall and hotel exposure, we like KLCCSS (BUY, TP: RM8.42) and SunREIT (BUY, TP: RM2.02). Stimulus aid aside, we are OVERWEIGHT on REITs given our expectations of another OPR cut in 1H20.

Mixed for aviation. In response to Covid-19, AirAsia (HOLD, TP: RM1.16) has pivoted its flight mix towards more domestic vs international. Initiatives such as digital vouchers (RM100) for domestic flights should help some demand recovery while rebates on landing and parking charges would ease costing for AirAsia. The latter move along with rental rebates at airports is negative for MAHB (HOLD, TP: RM6.75) but management said it is still awaiting details from the Government on this. To recap, during SARS (2003), (i) 50% discount was offered on landing and parking fees for certain flights and (ii) 50% discount on rental rates for outlets at airports.

Other Sectorial Impact From the Stimulus Include:

• Banks are required to provide financial relief in the form of payment moratorium comprising restructuring and rescheduling loans for affected businesses and individuals. This is positive for banks as it lowers the risk of related loans turning impaired and helps to contain rising credit cost.
• Government will allocate an additional RM2bn for immediate implementation of small infrastructure repair and upgrading; mildly positive for listed contractors.
• Neutral for Tenaga (HOLD, TP: RM13.50): (i) 6-month 15% electricity bill discount to those entitled will be fully funded via the KWIE fund and (ii) commitment to RM11bn capex for project such as LED street lights, transmission lines and rooftop solar forms part of its Regulated Asset Base (RAB).
• Waiving of listing fee (1 year) for those seeking to list on LEAP, ACE and Main Board with market cap <RM500m will have an insignificant impact to Bursa (HOLD, TP: RM6.12). For perspective, “listing and issuer services” made up 11% of revenue in FY19, contributed by 929 existing listed-cos; it is unlikely that new listings for the 3 categories above would have moved this needle much in the first place.

KLCI target at 1,600. Pending the conclusion of the ongoing 4Q19 results season, we keep our 1,600 KLCI target (16.2x PE on 2020 EPS; -0.5SD) unchanged. Foreigners have net sold -RM1.48bn in Malaysian equities YTD (as of 26 Feb), likely driven by Covid-19 and domestic political uncertainty. Should foreign shareholding fall from 22.4% to 21.4% (decade low), we estimate (using regression) a KLCI value of 1,442; there is a 59% correlation between the two. Our top picks will be reviewed post results season.

Source: Hong Leong Investment Bank Research - 28 Feb 2020