Last Fri the PM announced the RM35bn PENJANA economic recovery plan. Out of the RM35bn, direct fiscal injection is RM10bn (0.7% of GDP) and tax incentive is RM8bn (0.5% of GDP). Combined with previous packages (mainly PRIHATIN), the total economic stimulus now sums to RM302bn (20.1% of GDP). The fiscal deficit is now projected come in at -5.8% to -6.0% of GDP (previous: -4.8%, 2019: -3.4%). Sectorial wise, the PENJANA plan is positive for autos (SST exemption/ lowered), plantation (export duty removed), property (HOC, no RPGT and eased financing cap) as well as tourism related (aviation and GenM). Maintain KLCI target at 1,450 (16.1x PE on 2021 EPS).

NEWSBREAK

Last Friday, PM Tan Sri Muhyiddin Yassin announced a RM35bn “Short-Term Economic Recovery Plan (PENJANA)”. The plan is divided into 3 parts: (i) empower people, (ii) propel businesses and (iii) stimulate the economy, overall comprising of 40 initiatives.

HLIB’s VIEW: ECONOMICS

Major headline stimulus at RM35bn. The stimulus consists of RM10bn direct fiscal injection, RM8bn in the form of lower tax revenue, while the remaining comes from other agencies (e.g. BNM: RM1bn, telco companies: RM3bn). Combined with previously announced fiscal stimulus packages (bulk of which from PRIHATIN: RM260bn), the total economic stimulus now amounts to RM301.6bn, or 20.1% of GDP.

Direct fiscal injection of RM10bn and lower tax revenue of RM8bn. Although the headline figure stands at RM35bn, direct fiscal injection is at RM10bn (0.7% of GDP). A significant portion of government’s direct fiscal injection (RM9bn) will be channelled to address the challenges of rising unemployment. This allocation will be used to expand the wage subsidy program by another 3 months (RM5.3bn), provide reskilling and upskilling programmes for the youth and unemployed (RM2bn) and introduce hiring incentives (RM1.5bn). Other notable contributions include provision of grants and loans to SMEs for digitalisation of operations (RM0.7bn). On tax incentives, measures to promote property and passenger car purchases and extension of scope of expenses allowed as tax deduction and capital allowance amount close to RM8bn (0.5% of GDP).

Fiscal deficit at -5.8 to -6.0% of GDP. Without any additional revenue or savings, the direct fiscal injection (RM10bn) and revenue loss from tax relief measures (RM8bn) is expected to bring 2020 fiscal deficit to -5.8% to -6.0% of GDP (previous: -4.8%, 2019: -3.4%). MOF expects the additional fiscal outlay to be financed by domestic debt (MGS + MGII). Total government debt is expected to rise to 59-60% of GDP and statutory debt level (MGS + MGII + T-bills) to increase to 56% of GDP. This will require government to seek a simple majority in Parliament in July 2020 to allow for a temporary increase of the statutory debt level (current: 55% of GDP). Nevertheless, over the medium-term, government remains committed to bring the deficit back to c.- 3% of GDP. Finance Minister Tengku Zafrul anticipates that this will be the last stimulus package before the next Budget 2021 announcement (expected 1st week Nov).

GDP impact. The measures of the PENJANA plan focuses largely on supporting the labour market, encouraging digitalisation of businesses, providing various tax reliefs to ease firms’ cash flow and boosting foreign investment in Malaysia. While the measures are positive for private consumption and investment growth, a meaningful recovery remains highly dependent on the strength of global and domestic demand revival. As we anticipate cautious sentiment to persist and social distancing to remain in place, for now we maintain our GDP forecast at -6.0% YoY in 2020 (2019: +4.3% YoY) and expect BNM to lower the OPR by another 25bps in 2H2020 to 1.75%.

HLIB’s VIEW: MARKET

Recovery focus on employees and SMEs. Overall, the PENJANA plan appears to have its initiatives targeted at 2 key groups: employees (suffered pay cuts and job loss) and SMEs (negative impact from Covid-19 and MCO/CMCO). We reckon that this is the right focus as these segments have been one of the hardest hit by the negative ramifications of Covid-19.

Selective sector positives. Sector winners are automotive (100% sales tax exemption for CKD cars and 50% for CBU), plantation (export duty exemption for CPO and PKO (crude and refined)) and property (HOC reintroduced, RPGT exemption and 70% max financing for 3rd property lifted). Tax incentives were also accorded to the tourism sector: (i) tourist tax exemption, (ii) extension of SST exemption for hotels, (iii) extension of personal income tax relief of RM1k for tourism expenses and (iv) extension for deferment of tax instalment payment for tourism industry. The incentives to revive tourism augur well for aviation and GenM and are mildly positive for REITs (helping its clients, i.e. hotel operators survive). With RM9bn allocated to combat unemployment and protect jobs, the consumer sector is a possible beneficiary. Still, we must bear in mind that this is unlikely to be a consumption booster, but rather to cushion the slowdown caused by Covid-19 (i.e. loss of income, weak consumer sentiment, lower discretionary spending, etc.).

Maintain KLCI target at 1,450. Despite some sector positives from the PENJANA plan, we feel that market valuations are now at the higher end after the KLCI’s 27.6% rebound from its YTD low (1,220 on 19 Mar). In fact, the KLCI is only 1.2% below its pre-Covid level (using 23 Jan as the start of the outbreak, marked by the Wuhan lockdown). Along with earnings cut post “partial 1Q20 results”, the KLCI’s PE (1-year forward rolling earnings) is now at +1.5SD above its long term mean. Arguably, liquidity driven factors such as (i) unlimited QE by the Fed and (ii) decade high domestic retail participation have resulted to “more generous” valuations accorded than would normally be. Still, even after accounting for this liquidity flush (expressed by our applied mean valuation for the KLCI despite a recession), it is increasingly hard to justify such levels. Our KLCI target of 1,450 is based on 16.1x PE (long term mean) tagged to 2021 EPS.

Source: Hong Leong Investment Bank Research - 9 Jun 2020