Yesterday, TSMY was sworn in as the 8th PM of Malaysia. While the PM void has been filled, political uncertainty is likely to remain depending on how Parliament plays out when it reconvenes. While still too early to pinpoint policy continuity risk, we would eyeball on the recent “Covid-19 stimulus” and change in fuel subsidy mechanism. Should foreign shareholding fall from 22.4% (end-Jan) to 21.4% (decade low), we estimate (using regression) a KLCI value of 1,442. Stocks that may be hit due to perception are the “sins” (Genting, GenM, Carlsberg and Heineken). Maintain 1,600 KLCI target (16.2x PE on 2020 EPS; - 0.5SD) pending our 4Q19 results roundup sometime this week with a modest downside possibility.

NEWSBREAK

Yesterday (1 Mar), Tan Sri Muhyiddin Yassin (“TSMY”) was sworn in as the 8th Prime Minster of Malaysia. Although the exact numbers have yet to be officially finalised at time of writing, it is said that TSMY has the support of the majority of MPs (i.e. at least 112) in the 222 seat Parliament. Political parties that have pledged support to TSMY include BN (UMNO, MCA and MIC), PAS, Bersatu (although some of its MPs have claimed otherwise) and purportedly, GPS.

HLIB’s VIEW

Recapping a week of political uncertainty. To recap, the recent political drama first unfolded on 23 Feb in what was called the “Sheraton move”, which subsequently saw Bersatu and several PKR MPs leaving the PH coalition. Thereafter, Tun M resigned as the 7th PM and was reappointed by the Agong as interim PM. Efforts by Tun M to form a unity government failed to go thru and the 8th PM race eventually became one that involved Dato Seri Anwar Ibrahim (backed by PH) and TSMY (Bersatu). Over the weekend (Sat), after an 11th hour negotiation, PH announced that it was throwing its support behind Tun M for the 8th PM post, putting the nonagenarian in the race against TSMY.

Closure? While the appointment of TSMY has closed the 8th PM void, it is difficult to ascertain if this recent political debacle has come to an end. Tun M said that PH will call for an urgent sitting of Parliament to prove that he has the majority instead. The next Parliament session is set to begin on 9 Mar but the Speaker said this might be postponed to a later date. Depending on how this eventually plays out, the perception of political uncertainty is likely to persist in the minds of investors.

Policy continuity risk. It would be a rather consensus view that changes in governing administration (regardless of whom to whom) will likely give rise to policy continuity risk (perception or otherwise). While still too early to determine which policies are at risk, we would eyeball on (i) the “Covid-19 stimulus” which was drawn up by PH and presented by Tun M as interim PM last Thurs and (ii) changes in the fuel subsidy mechanism from a blanket approach to targeted; note that this was already delayed since 1 Jan 2020. Still, with TSMY having been on both sides of the political divide before (as DPM with BN and Minister of Home Affairs with PH), there is some hope that this policy risk could be less profound that thought to be.

Continued foreign selling likely. Foreigners have net sold -RM2.11bn in Malaysian equities YTD (as of 28 Feb), driven by Covid-19 and domestic political uncertainty. Should foreign shareholding fall from 22.4% (end-Jan) to 21.4% (decade low), we estimate (using regression) a KLCI value of 1,442; there is a 59% correlation between the two. On stock specifics, the presence of PAS in the new administration may see a sell-off in “sin stocks” given the perception, which is rather self-explanatory. Our stock calls on the brewers and gaming are: Genting (BUY, TP: RM6.17), GenM (HOLD, TP: RM3.13), Carlsberg (HOLD, TP: RM35.50) and Heineken (HOLD, TP: RM31.00). Arguably, these names have also been victim of Covid-19. On a brighter note, the episodes of Covid-19 and domestic politics have heighted domestic equities ADV which averaged RM2.31bn YTD (+15.5% YoY; Jan-Feb 2019: RM2.0bn). While the sustainability of better ADV associated with negative events may be short-lived, we may nonetheless still see some revived interest on Bursa (HOLD, TP: RM6.12).

Some downside to 1,600 KLCI target. We keep our 1,600 KLCI target (16.2x PE on 2020 EPS; -0.5SD) pending our 4Q19 results roundup sometime this week with a modest downside possibility. Top picks are under review.

Source: Hong Leong Investment Bank Research - 9 Mar 2020