Bank Negara Malaysia (BNM) recently released its 2019 annual report together with its Economic and Monetary Review as well as its Financial Stability Review documents, reducing its 2020 GDP growth forecast to range between -2.0% to +0.5% due to the coronavirus pandemic. Macquarie Equities Research (MQ Research) revised its KLCI target down to 1,533 (prev 1,672) for the year end while sharing its views on the sectors performance due the recent growth downgrade.

CIMB and RHB Bank are MQ Research’s core picks while Top Glove and Hartalega are foreign currency earners, among others.

Event

• BNM released its 2019 Annual Report together with its Economic and Monetary Review and Financial Stability Review documents. It has also updated its 2020 gross domestic product (GDP) growth forecast downwards to -2% to +0.5% owing to the Covid-19 pandemic and the mandatory control order (MCO). The key takeaway in MQ Research’s view is that while Covid-19 presents a significant challenge to the economy, having a potentially worse impact than the AFC on employment, the financial sector has far larger buffers to weather the storm.

• Updated KLCI target. In view of the ongoing Covid-19 pandemic and its impact on growth over 2020 and 2021 , MQ Research is updating its end-2020 KLCI target to 1,533 (prev 1,672) reflecting the slower earnings growth for 2020 (+2.3%) as well as a lower 2021 year end price-to-earnings ratio (PER) multiple of 16x (prev 17.5x) – similar to multiples seen in 2010, post the global financial crisis rebound (see Fig 1).

Impact

• GDP downgrade. The downgrades by BNM have factored in the MCO which is currently slated to end on 14 April – largely in the hands of the Ministry of Health. Private and public consumption are expected to remain positive and support domestic demand growth of 1%. However, net exports are expected to decline 27% YoY inline with the global slowdown and reduce the current account surplus to 1-2% of GDP vs 3% in 2019. All segments except for services are now expected to post YoY declines – including construction, despite refences to increase infrastructure spending. Headline Inflation is expected to range between -1.5 to 0.5% due to weaker oil prices, while core inflation is expected to range between +0.8-1.3%.

• Banking sector earnings under pressure to 2021. BNM’s outlook is broadly in-line with MQ Research’s recent earnings downgrade for the sector. MQ Research maintains -13% YoY aggregate bank earnings for FY20E, which assumes, 100bps overnight policy rate cut, -1.1% loans growth and +20% net provisions for FY20/21. In line with the earnings downgrade, MQ Research also cut gross dividend payouts. MQ Research concurs with BNM that banks have sufficient capital and liquidity buffers.

Outlook

• While near term volatility is likely to remain elevated, MQ Research believes investors should use any weakness to accumulate quality and thematic names for a recovery as newsflow around the virus improves and the MCO ends (worst case end April). MQ Research sees valuations of banks in particular beginning to show value with CIMB and RHBBANK as MQ Research’s core picks. Foreign currency earners in particular gloves (TOPG, HART), plantations (SDPL), PCHEM (a play on a pick-up in global activity levels) remain a key thematic, in MQ Research’s view. Tenaga meanwhile offers defensive qualities with capital management upside. Telcos while not in MQ Research’s top picks list are a worthy defensive play as well. PBK and MISC stand out as oversold with defensive qualities too.

Source: Macquarie Research - 6 Apr 2020