Following the crude oil price plunge recently, Macquarie Equities Research (MQ Research) has predicted that the Malaysian government deficit could jump to 4.3% (vs 3.4%), with debt to gross domestic product (GDP) to hit 54%. MQ Research expects the new Malaysian cabinet to continue with spending to kickstart the economy and believes that counters such as Top Glove and Hartalega will stand out, among others.

Event

• The 28% decline in oil prices since Thursday will have a negative impact on the economy and government finances, but MQ Research expects the new Malaysian government to proceed with spending to kickstart the economy which has been weighed down by the slowdown in government procurement since GE14 in May 2018. The new cabinet should have at its disposal, added funds from the slow start in spending thus far. By MQ Research’s estimates, the Malaysian government deficit could expand to 4.3% from the previously projected 3.4% if petroleum-related revenues halve.  

Impact

• Budget deficit could jump to 4.3%. By MQ Research’s estimates, a halving in non-Petronas dividend revenues in 2020 would hit government finances by RM13bn and leave the government budget deficit at 4.3%, assuming GDP growth slows further to 2.7% (latest projection by government at 3.2%) but spending continues as planned. This would push the debt-to-GDP figure up to 54% all else being equal. In coming to this conclusion, MQ Research has assumed that the RM24bn dividend from Petronas penned in for 2020 goes ahead, given Petronas’ more than RM83bn net cash position as at end-2019.

• Spending must go on. MQ Research believes the new government will be needed to start spending sooner rather than later, given the need to shore up consumer and business sentiment. The key infra projects may be accelerated with news flow likely in 2Q/3Q20. The one casualty is likely to be the Penang Transport Master Plan project.

• Banks – impairments likely but muted. The plunge in oil prices does raise the risk of banks taking further impairments on loans to the sector, but MQ Research notes that most banks had already taken sizeable provisions prior to this and have not taken writebacks. MQ Research understands that the banks’ exposure to the oil & gas sector is ~2.5% of loan books with Maybank the most exposed.

Outlook

• Cyclical rebound rather than staples preferred. In line with MQ Research’s regional strategist’s view, MQ Research believes investors should look to “accumulate discounted value and cyclicality, not staples”. Glove manufacturers (Top Glove, Hartalega) remain beneficiaries of the ongoing COVID-19 epidemic and are seeing pricing power return. Construction names (Gamuda, Econpile) stand to benefit from the resumption of government procurement. Malaysia Airports is poised for a rebound as COVID-19 fears recede. Worth noting that MISC’s share price weakness (-8% since Friday) may be overdone, considering that the bulk of its cashflow is from long-term charters and its spot exposure may benefit from increased demand for floating storage in a weak oil price environment. Likewise, oil storage play, Dialog (-9%).

12-month Target Price Methodology

• TOPG MK: RM7.35 based on a total shareholder return
• GAM MK: RM3.70 based on a total shareholder return
• ECON MK: RM1.00 based on a total shareholder return
• MAHB MK: RM8.10 based on a total shareholder return
• MISC MK: RM8.80 based on a total shareholder return
• DLG MK: RM3.90 based on a total shareholder return

Source: Macquarie Research - 11 Mar 2020