The appointment of PM Sabri should help assuage investor’s concerns on policy continuity as (i) he served as DPM and Defence Minister in the previous administration and (ii) no change of the political parties in government. We expect broad policies of his predecessor on vaccination rollout and economic reopening (despite elevated cases) to continue. With abated political risk, we feel the market’s risk to reward is now tilted to the upside as KLCI’s PE valuation is below -1.5SD. We roll forward our valuation horizon from end-CY21 to mid-CY22 at an unchanged 15.7x PE, raising our KLCI from 1,580 to 1,620.

NEWSBREAK

Last Sat, Dato' Sri Ismail Sabri bin Yaakob was sworn in by the Agong as the 9th Prime Minister (PM) of Malaysia.

HLIB’s VIEW

Policy continuity. The appointment of PM Sabri is perhaps the least disruptive from the perspective of policy continuity on 2 fronts. Firstly, having helmed the post of DPM (since July 2021) and Defence Minister (since Mar 2020), he has been at the forefront of the ongoing pandemic. Secondly, his appointment is said to have the backing of all MPs from the PN coalition (and perhaps some independents) resulting to no changes of the political parties in government. While some changes to the impending Cabinet line-up are possible, we reckon the broad based policies and direction (e.g. vaccination rollout and economic reopening) set forth by his predecessor Tan Sri Muhyiddin Yassin are likely to remain largely intact. Nonetheless, we are cognizant that PM Sabri’s support of 114 MPs – representing a rather slim majority of 4 seats – may give risk to political fluidity resurfacing down the road.

Vax stats remain strong. Despite no Cabinet in place since Muhyiddin resigned as PM on 16 Aug, daily vaccination numbers remains strong, averaging 505k over the past week (vs 467k in the preceding week). Former “Vaccine Minster” Khairy Jamaluddin (“KJ”) previously set a target of 434k average daily jabs in Aug and the current MTD number of 491k suggests that this is on track. We expect vaccination rates to continue its positive momentum under the PM Sabri led government and possibly, for KJ to resume helming the program given his commendable track record on it. Former PM Muhyiddin previously stated he was confident for Malaysia to achieve 80% herd immunity by end-Oct but our vaccine supply-demand model projects a more conservative timeline of early-Dec (Figure #1). Currently, 38.9% of the population has been fully vaccinated (adult population: 54.3%).

More reopening. Last Fri, Muhyiddin (who was acting as caretaker PM) announced further economic freedoms for those fully vaxed, which include dine-ins. From a stocksectorial standpoint, this move should help spur some recovery for brewers, consumer staples, F&B and mall based REITs. With eased risk of policy continuity, we expect the reopening momentum for those fully vaxed to continue rolling out. Nevertheless, we do err on its sustainability given that headline ICU and deaths have yet to see a convincing inflection point.

KLCI at 1,620. We reckon that most of the major near term political risks have subsided with the impasse appearing to be largely resolved. Coupled with further economic reopening measures, market sentiment should recover. We roll forward our valuation horizon from end-CY21 to mid-CY22 at an unchanged 15.7x PE target (- 1SD to reflect near term Covid-19 headwinds) and raise our end-2021 KLCI target to 1,620 (from 1,580). With abated political risk, we feel the market’s risk to reward is tilted to the upside as KLCI’s PE valuation is below -1.5SD to 5Y mean.

Source: Hong Leong Investment Bank Research - 23 Aug 2021