The local benchmark FBM KLCI (KLCI) plunged 9.3% week-on-week to end last week at 1,344.75 points. On Friday alone, the index fell 5.3% on the back of escalating fears over the Covid-19 pandemic and weaker oil prices. Macquarie Equities Research (MQ Research) wrote a report this morning (16 Mar), naming stocks that stand out to them that investors may consider accumulating, including glovemakers Top Glove and Hartalega, as well as defensive names such as Public Bank…

Event

• The KLCI dropped the most since 2008 on 13 March 2020 (-5.3%), on the back of escalating global fears of the Covid-19 pandemic and weaker oil prices, which have raised the risk of a global recession. Exchange traded funds (ETF) related selling has potentially also exacerbated the selloff.
• MQ Research screened the 50 stocks under its coverage and found that while valuations across the sectors are above Asian Financial Crisis (AFC) levels, banks, gaming (Genting Malaysia), construction and oil & gas are nearing Global Financial Crisis (GFC) levels, while property is below GFC levels. Stocks that standout as nearing GFC levels are Public Bank, HL Bank, CIMB, AMBank, MISC, IJM and Gamuda. Meanwhile Petronas Chemical is trading at its lowest price-to-book ratio (PB) levels since its IPO in 2010.  

Impact

• Global lockdown likely to weigh on gross domestic product (GDP). As countries around the world begin to impose restrictions on the movement of people and supply chains are impacted, MQ Research expects Malaysia’s GDP growth to be further impacted. The sharp pull back in oil prices is also set to weigh. For now MQ Research assumes a bear case GDP growth of 2.7% with the budget deficit expanding to 4.3% and debt to GDP at 54% as a result. While MQ Research doesn’t expect unemployment rates to jump significantly it does expect that wages will come under pressure in the service sector (tourism, hotels, F&B etc).
• Risks contained – oil & gas, property, airlines with greatest stress. Based on MQ Research’s screen of projected cashflows and debt positions as at end 2020, MQ Research finds that a significant portion of its coverage are unlikely to face financial stress from a slowdown in GDP. Where risks are elevated are in the property, oil & gas and airline sectors where geared balance sheets face elevated risks from a slowdown in the economy and cashflows.

Outlook

• Bombed out names worth accumulating to ride out the storm. While it is unclear if markets have already bottomed or more downside lies ahead, MQ Research believes investors should look to accumulate quality names which have been battered in the recent selldown. Public Bank, Tenaga and MISC are defensive names which MQ Research believes have been hit due to fundflows and offer good value.
• Rebound plays. Petronas Chemical, Genting Malaysia and Malaysia Airports standout as plays for when newsflow around covid-19 improve.
• Domestic reflation. Construction and infra names, Econpile, Ranhill and Gamuda, are beneficiaries of the new government accelerating infrastructure projects to stimulate the economy. Banks should benefit too, although MQ Research is mindful of credit risks and falling rates in the near term.
• Global thematics still attractive. MQ Research maintains its positive view on glove producers (Top Glove, Hartalega), crude palm oil (Sime Plant) and healthcare (IHH).

Source: Macquarie Research - 16 Mar 2020