Macquarie Equities Research (MQ Research) forecasts an early election may likely to happen around 4Q20 with an estimated timeline between late-August and early-November. MQ Research thinks that the Perikatan Nasional may have a bigger chance of winning, providing political certainty and positive impact to sectors including construction and telco, among others. MQ Research highlighted Econpile and AQRS as MQ Research’s small-cap top picks for infrastructure, along with other potential companies including CIMB, Telekom Malaysia and more.

Event

• As MQ Research articulated earlier, Malaysia Strategy – 2H20 – Enjoy the liquidity but mind the gap, MQ expects Malaysians to go to the polls in 4Q20 to once and for all settle the political uncertainty. What has changed is that the timeline for the elections appears to be moving forward, with a likely timeline now being late-August to early-November. Increasingly, the pendulum seems to be swinging toward a Perikatan Nasional win, which the business community seems to be happy about, as it is seen to be pro-business.

• With a more stable political situation likely to bode well for economic activity, MQ Research would see an early election as a positive for the market in general, with pump-priming likely to come after rather than before an election given time constraints, setting the stage for a positive end to 2020.

Impact

• Political certainty – positive for economy and the market. With a number of large-scale projects on hold, MQ Research would expect an early election to pave the way for more announcements around these. The construction sector would be the first port of call for exposure here, with the long-awaited Mass Rapid Transit 3 (MRT3), High Speed Railway (HSR) and Johor-Rapid Transit System (RTS) Link as key projects MQ Research would expect post elections. MQ Research would also expect resumption of key telco infrastructure projects, eg, National Fiberisation and Connectivity Plan (NFCP) and 5G, to kick off post elections.

• FDI – an added beneficiary. MQ Research would also look at political certainty making Malaysia an easier destination of choice for Foreign Direct Investment (FDI). Again, as highlighted in MQ Research’s recent report, trade tensions and to some extent the Covid pandemic have led to increased demand from global manufacturers to diversify their production bases, with Malaysia stacking up well within Asean from an ease (and cost) of doing business perspective, availability of skilled labour and good infrastructure.

Outlook

• MQ Research believes that small-cap top picks, Econpile and AQRS, as well as Gamuda (GAM MK, RM3.58, Outperform, TP: RM3.50), are best placed for infrastructure-related news flow post elections. Telekom Malaysia (and Time dotCom [TDC MK, RM10.88, Outperform, TP: RM11.35]) and smaller-cap IT service providers stand to benefit from increased digitalisation and network initiatives.
• CIMB and RHBBANK would be beneficiaries of a broader pick-up in corporate spending into 2021, notwithstanding near-term credit cost concerns, which MQ Research believes are largely reflected in suppressed valuations.
• MQ Research is also maintaining its positive views on the exporters/plays on global thematics. MQ Research upgrades of estimates and valuations for the glove sector and, in particular, Top Glove (Malaysia Rubber Gloves – 2nd wave is coming; Get ready for the ride, 3 July 2020) highlights the strength of global demand and why MQ Research believes prices are set to stay higher for longer.

Source: Macquarie Research - 6 Jul 2020