BNM cut the OPR by 50bps to 2.00% as lockdown measures to contain Covid-19 have impacted economic conditions both globally and domestically. This cut is broadly within expectations and we see room for another 25bps cut in 2H20. The cut’s negative impact for banks should be less severe this time (quicker FD repricing) while the positive impact to REITs may be muted (retail REITs bearing the brunt of MCO). With KLCI dividend yield spread to OPR and MGS at >+3SD, this suggest room for upside on divvy plays. Maintain KLCI target at 1,350.

NEWSBREAK

50bps OPR cut to 2.00%. During yesterday’s MPC meeting, the committee decided to cut the OPR by 50bps to 2.00%. In a nutshell, global economic conditions have worsened significantly as measures to contain Covid-19 have disrupted economic activity across most countries; Malaysia too has not been spared.

HLIB’s VIEW

As anticipated. The OPR cut was broadly inline with our expectations for “another 50bps cut for 2020 (totalling 100bps)”, although we thought that it would be more staggered. With the OPR now at 2.00%, this is at the same level reached during the GFC. However, should deterioration in economic conditions prolong, we reckon that BNM still has sufficient room for further easing given muted inflation and an uncertain growth outlook. As such, we think it is possible for BNM to reduce the OPR by another 25bps in 2H20 to 1.75%.

Market thoughts. Generally, the 50bps OPR cut is negative for the KLCI by virtue of the index heavyweight banking sector (NIM compression concerns); although we do note that (interestingly) the KLFIN closed yesterday green (+1%). Rewinding back, in the past 3 OPR cuts (all 25bps each), the KLCI fell by (i) -2.5% in a span of 1-week since 7 May 2019, (ii) -3.6% over 12-days since 22 Jan 2020 and (iii) -17.5% in 12- days since 3 Mar 2020; although the latter 2 observations were also amplified by Covid-19. While negative for banks, our banking analyst notes that earnings impact should be less severe this time around as FD repricing is also quicker, given c.80% is expiring by Jun 2020. Although a dovish setting has done well for REITs in the past, it could be partially muted this time around as retail based REITs are bearing the brunt of the MCO. Axis would be our preferred pick in the REIT space as it is relatively more insulated from the MCO given its industrial tilt.

Play on the divvy yielders. The KLCI’s dividend yield now stands at 4.53%, representing a spread of 2.53% to OPR and 1.68% to 10-year MGS. These spread readings are rather unprecedented at >+3SD above 10-year mean, suggesting some upside potential for divvy plays. In addition, the defensive appeal of high divvy yielders should also stand out in light of the uncertainties from Covid-19. Some of the BUY rated divvy yielders that we like are Astro (yield: 9.1%), BAT (8.3%), Pecca (7.6%), MQREIT (7.6%), Taliworks (7.4%), MBM (7.0%), Pharmaniaga (6.7%), HSI (6.3%), Matrix (6.2%) and Edgenta (5.1%).

Maintain KLCI target of 1,350. We maintain our KLCI target of 1,350 (14.6x GFC mean PE pegged to mid-2021 EPS). Having rebounded 13.9% from its low of 1,220 (19 Mar), some degree of profit taking could perhaps emerge as we enter the May reporting season. Key risks to watch out for include (i) a 2nd wave with lockdowns around the world eased/ lifted and (ii) possible resurgence of US -China trade war, noting the less than cordial statements by President Trump on China.

Source: Hong Leong Investment Bank Research - 6 May 2020