The 2/3rd majority win by BN in last week’s Johor elections has heightened grapevine talks of an early GE15. Two out of the last three GEs saw a positive effect on ADV in both the election year (YoY increase) and election month (MoM increase); the exception was GE12 (2008) due to the GFC. With the “election clock” ticking, we think investors will eventually start positioning on Bursa to ride on the potential ADV boost. Upgrade to BUY (from Hold) with TP of RM7.27 based on 23.3x FY22 PE. Valuations aren’t excessive with PE hovering near mean and -19% discount to peers. With ADV recovering for the past three consecutive months, MC/ADV is compelling at -1.4SD below post-GFC mean.

Case for an early GE15. Malaysia’s recent political landscape has been pretty unprecedented, with the three premiership changes in less than four years and a current government comprising of loosely tied coalitions (BN, PN and East Malaysian parties) holding a rather uncomfortable majority of four in the August house. Adding to political fluidity were the two Peninsular state polls (Melaka and recently, Johor) which saw BN and PN take on each other in multi-cornered contests with other opposition parties. In both state polls, BN emerged the victor with a 2/3rd majority. This has intensified grapevine talk that the national polls could happen sooner rather than later; GE15’s deadline is by July 2023. There is currently a MoU between the federal government and opposition-PH not to dissolve Parliament before end-July 2022, making 2H22 a possible timeline if early polls are to be called.

Mostly positive effect on ADV. We evaluate ADV trends during the past three GEs – we chose this time horizon as it reflects a somewhat “structural political shift” where BN did not secure a 2/3rd majority (which it previously commanded since GE4 in 1974). Overall, two out of the three past GEs saw a positive effect on ADV in both the election year (YoY increase) and election month (MoM increase) – the exception was during GE12 (2008) as a result of the GFC. (see Figures #3-5).

• GE14 (9 May 2018): Despite 2017 ADV having a high base back then (RM2.31bn; +27.6% YoY) – partly due to anticipation of early polls – this sustained into 2018 as well (the election year) at RM2.39bn (+3.4% YoY). ADV also surged +62.9% MoM in May 2018 (the election month) with heightened trading following the regime change.
• GE13 (5 May 2013): 2013 ADV increased +20.5% YoY to RM1.92bn during the election year. During the election month (May 2013), ADV soared +59.8% MoM.
• GE12 (8 Mar 2008): This was a rather unique election year where ADV did not increase YoY, but instead plunged -45.8% to RM1.18bn. However, this was likely attributed to the onslaught of the GFC which dragged on into 2009 (ADV fell by another -5% YoY). Unlike GE13 and GE13, there was also no MoM rise in ADV during the election month (Mar 2008: -5.1% MoM).

Forecast. We raise FY22/23 earnings by 4.9%/3.0% after updating our model for the latest annual report release and introduce FY24 earnings. Note that we have not explicitly imputed any potential ADV upside from GE15 into our forecast. Should this happen in 2H22, the ADV decline in FY22 should be less profound (we currently project RM2.48bn; -30% YoY).

Upgrade to BUY, TP: RM7.27. With increasing probability of an early GE15, we think investors will eventually start angling on Bursa to ride on the potential ADV boost. Current valuations aren’t excessive with PE hovering near 5Y mean and at a -19% discount to regional peers. With ADV recovering for the third consecutive month, MC/ADV ratio is at an attractive 1.6x (-1.4SD below post-GFC mean). Our higher TP of RM7.27 (from RM5.95) is premised on 23.3x PE (+1SD to 5Y mean) tagged to FY22 EPS – still at a discount to regional peers average of 25.2x.

Source: Hong Leong Investment Bank Research - 16 Mar 2022