In response to the extension of FMCO, PM Muhyiddin unveiled yet another aid package – this time worth some RM150b that included a 6-month loan moratorium and a third EPF withdrawal scheme. These extended supports aimed at the financially challenged are necessary given the fragility of this recovery due to the higher-than-expected Covid-19 infections of late. With just RM10b to be directly funded out of the Federal budget, 2021’s budget deficit is likely to widen to RM105b – the largest ever – which represents 6.9% of GDP compared to 6.3% previously. There is a fair chance, we think, of the 60% statutory debt-to-GDP limit being breached. And, given heightened macro risks in terms of the fiscal position and downside bias to banks’ earnings as a result of the loan moratorium, we reduce the year-end target for the FBMKLCI to 1,575 from 1,710 previously.

6-month loan moratorium for individuals and SMEs: The term of this moratorium is different from last year’s in that borrowers wishing to take up the moratorium will need to opt in by applying from 7th July whereas last year, all borrowers by default, enjoyed the moratorium unless they chose to opt-out. In that sense, while there is downside bias to banks’ earnings from this, the scale of mod loss might be much less. Besides, the impact of mod loss may again be reduced, if like last year, BNM soften the blow by lending liquidity to the banks at preferential rates.

Extended supports for SMEs: In providing further support for SMEs, the government via Syarikat Jaminan Pembiayaan Perniagaan Berhad (SJPP) will raise the ceiling for debt guarantees by RM20b to RM56.5b for 2021. The level of debt guaranteed now stands at RM33.4b. On top of this, BNM is giving financial aid totalling RM25.1b to SMEs from which there is a balance of RM6.6b left untapped. BNM will raise this balance to RM8.6b. All such measures bode well for the sector which forms the largest employer in the economy and for the banks’ SME portfolios.

Three months electricity discounts for domestic users and the worst impacted business sectors: For three months beginning July (3QCY21 effectively), discounts on electricity for domestic users ranging between 5-40% based on usage will be given for up to 900kWh consumption per month. These discounts are estimated to be worth RM346m. And, 10% discounts which are currently offered to severely impacted business sectors e.g. tourism-related, theme parks, and shopping malls will be extended by another quarter i.e. 4QCY21. Our checks with Tenaga suggested that these supports amounting to RM1b will be borne solely by the government.

Digitalisation and e-commerce incentives: In support of digitalisation and cashless transactions, RM200m will be allocated to micro enterprises and RM100m to SMEs to enable them to set up digital payment platforms under the SME Digitalisation initiatives. Additionally, with the government requiring all payment transactions involving government agencies to be cashless by end 2022, e-payment service providers such as GHL (OP; TP: RM2.30) and Revenue Group (UNRATED) have much to gain.

More cash handouts for the masses: As a follow through of BPR (Bantuan Prihatin Rakyat) program, BKC (Bantuan Khas Covid) promises RM4.6b to benefit 11m households and singles, making up the hardcore poor, B40 and M40, by way of cash handouts in the month of August and December. And, an estimated one million victims of job losses stand to receive RM500 each in October. These measures are seen not so much a boost as they are a relief for the financially stressed to sustain consumption of basic needs while waiting to ride out this challenging period.

EPF’s i-Citra allows members to withdraw up to RM5,000: An estimated 12.6m EPF members are allowed to withdraw up to RM5k at a monthly fixed rate of RM1k for five months subject to available savings. Members can apply effective 15 July with first payment in August. An estimated of amount up to RM30b is available for withdrawal. With i-Lestari withdrawals closed in March and i-Sinar disbursements towards the tail end, i-Citra renews concerns over deepening outflow of funds.

Risk to higher MGS yield?: We believe the scale of i-Citra’s withdrawal would be closer to i-Lestari where an estimated RM22b was drawn down over a one-year period (Apr 2020 – Mar 2021) and certainly well below i-Sinar’s RM60b. There will be justifiable concerns over whether the EPF will need to liquidate investments to fund the outflows. But given that EPF’s strategic asset allocation is tilted more heavily towards fixed income (reported in 2019 to be 51% fixed income instruments, 36% equity, 10% real estate & infrastructure and 3% money market), a larger portion should likely be funded via bonds liquidation which thankfully is still drawing in foreign inflows. However, there is heightened risk of a rise in MGS yields as a result. Recall that the knee-jerk spike in MGS yields November last year was in response to fears that EPF may have to reduce holdings in investment assets to fund i-Sinar withdrawals (announced in Budget 2021 tabling in Nov 2020).

FBMKLCI target reduced from 1,710 to 1,575: Accounting for (i) a higher risk free rate of 3.60% (using 10-year MGS yield as a proxy) from 3.30% previously for the reasons above and prospects of tapering in the US and (ii) increasing the equity market risk premium from 3.24% (0.8SD above 10-year mean) to 3.40% (1.0SD above) to reflect challenging fiscal conditions, we lower our applied forward PE multiple from 15.3x to 14.3x (about 1.0SD below 10-year mean) on FY22 EPS of 110.0 sen. This brings our year end target for the FBMKLCI to 1,575.

Source: Kenanga Research - 29 Jun 2021