BNM cut the OPR by 25bps to 2.50% as economic conditions have worsened both globally and domestically due to Covid -19. This cut is within our expectations and we are calling for another -25bps cut in May. Sectorial wise, this is negative for banks but positive for REITs. High divvy yielders should remain in flavour in light of this cut. With KLCI dividend yield spread to OPR and 10-year MGS at +3SD, this suggests room for share price upside on divvy plays. Maintain KLCI target at 1,590.

NEWSBREAK

25bps OPR cut to 2.50%. During yesterday’s MPC meeting, the committee decided to cut the OPR by -25bps to 2.50%. In a nutshell, economic conditions have worsened both globally and domestically due to the Covid-19 outbreak and downside risk remains.

HLIB’s VIEW

Within expectations. The OPR cut was inline with our expectations; our case was anchored on 2 downside risk factors that subsequently broke out post Jan cut, i.e. Covid-19 and domestic political uncertainty. Looking ahead, our economics team is projecting for another -25bps cut during the May MPC meeting. This is premised on further downside risks emanating from (i) a prolonged Covid-19 episode and (ii) policy continuity uncertainty from the recent political landscape change.

Winners and losers. Broadly, the -25bps OPR cut is negative for the KLCI by virtue of the index heavyweight banking sector (NIM compression concerns). To recap, in the past 2 OPR cuts (both -25bps), the KLCI fell by (i) -2.5% in a span of 1-week since 7 May 2019 and (ii) -3.6% over 12-days since 22 Jan 2020 (arguably, this was also influenced by the start of Covid-19). While negative for banks, our banking analyst reckons that most of them have already anticipated another round of cut (as highlighted in their 4Q19 results conference calls last week) and were still able to actively manage their FD level to prevent overexposure (for quicker repricing). Please refer to our banking sector report today for further details. On the possible sector positives, a dovish setting should generally spur interest in REITs in which we are OVERWEIGHT on. Although data points on the KL-REIT index are limited (only began in Oct 2017), its broad inverse relationship to OPR is still visible (see Figure #1). Within the REIT space, our top picks are KLCCSS (yield: 4.6%) and SunREIT (5.4%).

High divvy yielders to remain in flavour. Currently, the KLCI’s dividend yield stands at 3.77%, representing a spread of 1.27% to OPR and 0.99% to 10-year MGS. These spreads are unprecedented, at +3SD above 10-year mean, suggesting room for share price upside on divvy plays. In addition, the defensive appeal of high divvy yielders will also stand out in light of the uncertainties from Covid-19 and domestic politics. Figure #4 lists down the top divvy yielders within our coverage which we feel are sustainable.

Maintain KLCI target of 1,590. We maintain our KLCI target of 1,590 based on 16.3x PE (-0.5SD) tagged to 2020 EPS. YTD (2 Mar), foreigners have net sold -RM2.4bn in Malaysian equities (2019: -RM11.1bn). Latest foreign shareholding data shows that the reading slipped slightly from 22.4% (end-Jan) to 22.3% (end-Feb). For a downside risk assessment, assuming foreign shareholding falls to 20.7% (decade low, last seen in Feb 2010), we estimate (using regression) a KLCI level of 1,385; there is a 75.7% correlation between the two.

Source: Hong Leong Investment Bank Research - 4 Mar 2020