The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to bounce back last week as renewed buying interest in selective blue chip heavyweights lifted the index higher. On the other hand, uncertainty over the Federal Reserve’s plans to cut interest rates in June and hawkish comments from some Federal Reserve officials checked gains ahead of the weekend.

Week-on-week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rose 19.18 Points or 1.25 percent, to end at 1,555.25, as gains in Press Metal Holdings Bhd (+64sen), Sime Darby Plantation (+25sen), Maxis (+18sen), Tenaga (+14sen) and Petronas Chemical (+14sen) overcame falls on Public Bank (-4sen) and Maybank (-5sen). Average daily traded volume last week mildly improved to 3.8 billion shares as compared to 3.6 billion shares the previous week, but average daily traded value stayed low at 2.63 billion, against the RM2.82 billion average the previous week.

The FBMKLCI could consolidate in this holiday-shortened Hari Raya week as investors speculate Iran’s reactions to Israel’s attack on its consulate in Damascus last week and digest incoming economic data that will influence policy decisions of major economies like the US and China. Investors will be watching closely the US consumer price index (CPI), especially changes in shelter and services cost, and producer price index (PPI) this Wednesday and Thursday, respectively. The FOMC meeting minutes for March is also due this Thursday. China is also due to announce its CPI and PPI data on Thursday followed by trade data the next day. Hopefully, a recovery in China’s pricing pressure and demand for goods could assuage investors about Malaysia’s trade prospects after an expected softer YoY expansion (1.7% versus January’s 4.3%) in February industrial production index today.

Rising tension in the Middle East could add to the “higher-for-longer” expectations as the inflated crude oil prices exert pressure on prices of goods and services. The black gold got a shot in the arm after a series of events last week raised concerns about supply disruptions amid improving demand. First was the Ukrainian drone attack last Tuesday on Russia’s third-largest oil refinery, Taneco, which hit a primary refining unit that processes about 155,000 barrels of crude per day, almost half the refinery’s daily capacity of 340,000 barrels. Ukraine has hit Russian refineries before and this destruction could continue to dampen the latter’s source of revenue and affect its economy. This has already forced Russia to curtail exports of refined oil products to meet domestic demand and a prolongation could affect the global oil market. It is yet to be seen how Ukraine’s Western allies will react but an high oil price in a presidential election year will not go well for the US.

On the same day, Israel’s missile struck Iran’s consulate in Damascus, Syria and killed 13 people. Iran has vowed to retaliate. In the past Iranian attacks on Israel were done through proxies in Gaza, Iraq, Lebanon and Syria but not direct from its soil. Its direct involvement may complicate matters as it may evolve to include their respective allies and even cut off the flow of crude oil and liquified natural gas through the Strait of Hormuz where 25% and 20% of the cargoes sail through respectively. In a virtual meeting the following day, OPEC+ added fuel to the tight supply situation after maintaining its 2.2mn barrels per day supply cuts for the 1H24. Some member countries have also pledged full conformity and agreed to compensate for overproduction.

Recall that we have discussed in detail the implications of the Israel-Hamas war in a strategy report titled “Will the Dark Clouds Engulf the World?”

(https://taresearch.taonline.com.my/rrs/files/2023/10/Israel_Hamas_War_20231019.pdf) issued on 19 October 2023. In this report, we have indicated that if the war is contained the initial kneejerk downside movements in the FBMKLCI will be limited to between 2% and 5%, with the 9 June 2023 low of 1,369.41 (consensus CY24 PER of 12x). acting as a strong support. In a worst-case scenario, we have highlighted the correction could be steeper and prolonged for a few months as what transpired during the “9/11 attack”. In such a situation, the “market bottom” is anybody’s guess, as it will depend mainly on what transpires during that period. If it mirrors the plunge during the “9/11 attack”, the March 2020 low of 1,207.80 (consensus CY24 PER of 10.6x) is expected to act as a very strong support. Bear in mind that was the low we witnessed when the whole world came to a standstill because of Covid-19. Thus, it should be a tough nut to crack with the current low foreign shareholding of 19.6% minimising the possibility of a drag from foreign selling. Besides, at this level, the FBMKLCI will be trading at a very attractive CY24 price-to-book of only 1.0x

Thus, the rosy short-term outlook for crude oil price might stand in the way of Federal Reserve’s guidance for three rate cuts this year, which is widely expected to happen in the 2H24. The cautious sentiment was reflected in the US financial markets last week. As at last Friday, the 10-year US treasury yield has risen 110 basis points to 4.40% in a 12-month period as the continued strength in the US economy defied rate cut expectations. For instance, the non-farm payrolls for March that was released last Friday showed a strong increase of 303,000 versus Bloomberg forecast of 214,000 while unemployment rate fell to 3.8% from 3.9% a month ago and average hourly wages rose 4.1% vs. 4.3% in February, both matching Bloomberg consensus forecasts. Post announcement, the probabilities for a rate cut in June and July by the CME FedWatch Tool have declined to 53.2% and 72.6% from 60.4% and 76.8%, respectively a week earlier. The rising bond yield as bond prices fell will increase the cost of capital and eventually make the overvalued equities less attractive comparatively. If flight to safety and rising bond yield sustain US dollar’s strength, foreign inflows into our local equities can be delayed, which has seen a net outflow of RM2.9bn in March that has totally wiped off the RM2bn net inflow in the first two months.

Increase in crude oil prices should keep the Malaysian government’s targeted fuel subsidy rationalization plan in 2H24 intact. Thus, the uncertainty over the quantum of pump price increase and its implications on the overall consumption and inflation may continue to haunt investors, who fear too large an increase will negatively affect the economy. Based on our calculation, ceteris paribus, every 10 sen/litre increase in pump price will raise inflation by 0.2% point. That said, we believe the increase in pump prices will be gradual, probably targeting a yearly savings of around RM10bn (an approximate increase of 40 sen/litre for RON95), based on the indicative RM11.4bn reduction in subsidies to RM52.8 in the Malaysian government’s Budget 2024. This will be targeted at people in the T20 group who enjoy about 53% of the fuel subsidies.

The B40 group and, to a certain extent, the lower band of M40 (M1 and M2) should receive cash assistance from the government to neutralise the negative impact. For the higher income group that is affected, there can be some changes in consumption habits in the initial period. It may not last as they realise the impact on their purchasing power is marginal due to a growing economy and a healthy labour market that delivers higher income growth. For instance, rounding up the 40 sen increase as 20% based on the current RON95 price of RM2.05/litre, an average consumer who spends RM300/month on petrol will see an increase of RM60/mth in the monthly bill.

The increase will be far less for those who use motorbikes, especially the B40 group. Besides, in the long run, the benefits will be many folds if the government channels these savings into productive ventures. That said, the crucial task for the government in this price increase is to ensure proper monitoring and enforcement of the law to prevent unscrupulous businessmen and businesses from taking advantage of the situation and raise the prices of their products and services arbitrarily.

The robust outlook for crude oil prices prompts us to maintain our Overweight stance on the Oil & Gas sector with buy recommendations on upstream service providers such as VELESTO (TP: RM0.33) and PANTECH (TP: RM1.18). VELESTO’s earnings are expected to grow as DCR for jackup drilling rigs remains high due to the tight market supply while PANTECH would benefit from higher Petronas and the oil and gas industry’s capex. Petronas has allocated between RM50bn-60bn in capex for this year, consistent with the RM52.8bn (+5.3% YoY) spent in 2023. We also like MISC (TP: RM8.30) due to expectations of higher LNG charter rate in tandem with higher demand for natural gas as a transitional fuel. We believe MISC is a top contender for future FPSO projects, considering the clean audit results and exceptional safety profile of Mero 3. Other direct beneficiaries of resilient oil prices are oil field owners such as HIBISCS (Not Rated) and DIALOG (Not Rated), which will benefit from the geopolitical tension due to increased demand for storage at its tank terminals

Corporate

Mah Sing Group Bhd has acquired a parcel of land in Pulai, Johor Bahru for RM103.8mn in cash through its subsidiary, Venice View Development Sdn Bhd. This marks the group's second land purchase within 4 months. The land is designated for a residential development project named M Tiara 2, with a gross development value of RM1.5bn. Financing for the acquisition and development will be sourced from internally generated funds or bank borrowings, with the proposed acquisition scheduled for completion in 2HCY24. (Bursa Malaysia/The Edge)

Comment: Overall, we are positive about the proposed acquisition given its strategic location and reasonable acquisition price. We raise our TP to RM1.57/share, based on a higher target P/Bk multiple of 1.0x. This valuation falls within the stock’s upcycle valuation band, which ranges between 0.8x-1.2x. Maintain Buy call on the stock.

Velesto Energy Bhd said it expects to weather Saudi Aramco’s broader suspension of jack-up rigs, as the oil-and-gas services firm remains “optimistic” of its financial performance until 2026. Shares of Velesto declined after several companies had their rig contracts suspended by the state-owned Aramco in recent days. “While we agree these events will have an effect on global jack-up demand and supply balance, overall utilisation is likely to remain high as global oil and gas capital expenditure remains strong,” a spokesperson from Velesto told The Edge. (The Edge)

KLCC Property Holdings Bhd (KLCCP) (Not Rated) has issued Sukuk Wakalah worth RM2.0bn to finance the acquisition of a 40% stake in Suria KLCC Sdn Bhd. The sukuk, with a tenure of 3 to 5 years, offers a periodic distribution rate of 3.7% to 3.9% per annum. KLCCP currently holds a 60% stake in Suria KLCC and aims to acquire the remaining 40% by the second quarter of 2024. (Bursa Malaysia/The Edge)

UEM Edgenta Bhd (Not Rated) has secured contracts for hospital support services in Singapore for 5 years, valued up to RM963.5mn. The contracts are facilitated by its Singapore-based subsidiary UEMS Solutions Pte Ltd. Although the number of hospitals involved was not disclosed, the total contract value is estimated to be between RM934.6mn to RM963.5mn, subject to the finalisation of manpower resources. (Bursa Malaysia/The Edge)

MMAG Holdings Bhd's (Not Rated) subsidiary, MJets Air Sdn Bhd, has been appointed by Malaysia Airlines Bhd to provide a regional cargo feeder network using narrowbody freighters for MAB Kargo Sdn Bhd (MASKargo) starting 1 May 2024, for a 6-month period. (Bursa Malaysia/The Edge)

Plantation and healthcare group TDM Bhd (Not Rated) clarified that it has no plans to list its healthcare arm and has no knowledge any reason for the run up in its share price. TDM's recent trading activities have led to a rise in its share price to a 3-year high, reaching 32.5 sen amid growing market valuation ascribed to its healthcare-related businesses, particularly after the RM5.7bn disposal of Ramsay Sime Darby Health Care Sdn Bhd to Columbia Asia Healthcare Sdn Bhd. (Bursa Malaysia/NST Online)

Berjaya Land Bhd’s (Not Rated) aviation arm Berjaya Air Sdn Bhd (BAir) is aiming for a 6% revenue growth YoY in the next 5 years, supported by 2 new turboprop aircraft, capacity expansion and possible new routes, both in Malaysia and the region. BAir general manager Mohd Amri Mohd Akib said the carrier is considering capacity expansion, particularly to destinations where Berjaya owns resorts such as Langkawi and Penang. Mohd Amri said he is confident with the prospects, as the company remains a non-schedule carrier, which makes it niche and agile as an operator. (The Edge)

Haily Group Bhd (Not Rated) has secured a RM59.5mn contract for a terrace house construction project in Johor Bahru. Awarded by Austin Senibong Development Sdn Bhd, the contract involves construction of 220 double-storey terrace houses and one main switch station. (Bursa Malaysia/The Edge)

Asia Media Group Bhd (Not Rated) will be traded and quoted under its new company name, MMM Group Bhd, from 9 April 2024. (The Star)

Keyfield International Bhd’s (Not Listed) public issue of 40mn shares under its initial public offering (IPO) exercise has been oversubscribed by 9.7 times. (Bernama)

Johor-based wholesaler and distributor of fresh vegetables, food and beverage (F&B) products and other groceries Farm Price Holdings Bhd (Not Listed) has entered into an underwriting agreement with Alliance Islamic Bank Bhd ahead of its upcoming IPO on the ACE Market of Bursa Malaysia. (The Edge)

Retirement Fund Inc (KWAP) has become a substantial shareholder of Farm Fresh Bhd after purchasing an additional 4mn shares or 0.2% stake on 3 April 2024, raising its stake to 5.1% (Bursa Malaysia/The Edge)

Fast Energy Holdings Berhad (Not Rated), a loss-making oil bunkering services provider, has become a significant shareholder in Vsolar Group Bhd (Not Rated) by subscribing to 140mn shares in Vsolar's rights issue at 10 sen each, totaling RM14mn. This subscription grants Fast Energy a 28.2% stake in Vsolar. Complete details of all shareholding changes resulting from the rights issue have not been disclosed just yet. The only disclosed change involves Vsolar executive director Koo Kien Yoon, who increased his stake to 15.1% by subscribing to 75mn shares. (Bursa Malaysia/The Edge)

Chin Hin Group Bhd (Not Rated) has increased its stake in Chin Hin Group Property Bhd (CHGP) (Not Rated) by 3.4% to 57.1%, buying 22.4mn shares at an average price of RM1.31 each for a total of RM29.3mn between 19 March and 24 April 2024. (Bursa Malaysia/The Edge)

Source: TA Research - 8 Apr 2024