Investment Highlights

• Start of the government’s fuel subsidy rationalisation programme. Diesel prices in Peninsular Malaysia will be floated at the retail price of RM3.35/litre starting from midnight today, which means the price of Euro 5 B10 and B20 diesel in the peninsula will rise 56% or RM1.20 from the current capped price of RM2.15/litre since February 2021. We understand that the price of Euro 5 B7 – which presently costs 20 sen per litre more – will be adjusted to RM3.55/litre.
  
  According to Finance Minister II Datuk Seri Amir Hamzah Azizan, the new retail price of the fuel is based on the automatic pricing mechanism (APM) formula for May. He added that under the targeted diesel subsidy implementation, the government has set diesel fuel prices for eligible sectors as follows:
  
  ➢ Subsidised Diesel Control System (SKDS) 2.0, which provides fleet cards to eligible logistics vehicles to mitigate the impact of the diesel price on consumer goods prices, is set at RM2.15/litre.
  
  ➢ Subsidised Diesel Control System (SKDS) 1.0 for land public transport, including school buses, express buses, ambulances and fire engines remains at RM1.88/litre.
  
  ➢ Subsidised diesel for fishermen is maintained at RM1.65/litre.

• No impact in East Malaysia for now. The price float for diesel follows on the announcement made by Prime Minister Datuk Seri Anwar Ibrahim on 21 May this year that the government was set to implement targeted fuel subsidies, starting with diesel in the Peninsula Malaysia while Sabah and Sarawak to be resolved later. For now, diesel price remains at RM2.15/litre in Sabah, Sarawak and Labuan.

• Deploying fleet card programme. The removal of the blanket subsidy for diesel will see targeted subsidies being dispensed via the Budi Madani assistance programme. Announced on May 27, the programme is open to private owners of diesel-powered vehicles as well as agricultural smallholders in Peninsular Malaysia. Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said that a total of 33 types of public transportation and goods vehicles will continue to enjoy subsidised diesel through the use of fleet cards under SKDS.

• RM200/month in Budi Madani assistance. Eligible recipients in lower-income group are set to receive RM200/month in financial assistance, which covers the first 167 litres of diesel usage. Applicants for diesel subsidies who have been approved by 3 June numbering over 30k will soon be receiving their first Budi assistance payments today.
  
  Meanwhile, Peninsular Malaysia Logistics Entrepreneur Association is awaiting for more details from the Domestic Trade and Cost of Living Ministry on which selected types of public transportation and goods vehicles would continue to enjoy subsidised diesel as a number of companies are still awaiting the fleet cards.

• Likely muted inflationary impact for now. We are positive on the government’s strategy of targeted subsidy rationalisation to improve the country’s fiscal position by reducing up to RM4bil annually in diesel subsidies as the impact on inflation from the diesel plan is likely to be muted. However, we are cautious on the government’s implementation in mitigating the impact as some businesses may opt to raise prices even though not directly impacted by higher transportation expenses.
  
  Additionally, this is just the first phase of the government’s plan to reduce fuel subsidies with the much larger RON 95 petrol price rationalisation targeted in 2H2024. Currently, our economist is projecting Malaysia’s 2024F CPI at 3% vs. consensus’ 2.5%.
  
  As the inflationary impact appears muted for diesel rationalisation, we do not expect a substantive negative impact to equity markets for now. As diesel-powered vehicles account for a minor segment of vehicle sales, this translates to negligible impact on the automobile sector. As public transport continues to benefit from the subsidy, we do not expect any impact to transportation-related stocks such as Perak Transit.

• Maintain base-case end-2024 FBM KLCI target at 1,635, pegged to a 2024F P/E of 15.2x – 0.25 standard deviation above the 5-year median of 14.6x, supported by robust domestic liquidity amid bullish sentiments from the government’s recently unveiled National Semiconductor Strategy which aims to draw in RM500bil of investments with RM25bil budget incentives which will be announced at a later stage.
  
  We remain cautious of:
  
  i) slowing global economic growth prospects,
  
  ii) less-optimistic expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, and
  
  iii) moderating domestic consumption amid rising domestic inflation from further targeted subsidy rationalisation later in the year.
  
  In our view, these downside risks could be partly mitigated by improving local institutional liquidity while Malaysian equities offer decent corporate earnings prospects, compelling dividend yields of 4% and low foreign shareholding low of 19.6% amid reinvigorated expectations of infrastructural rollouts on a firm government mandate.
  
  The worst-case scenario from a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts translates to an end-2024 FBMKLCI target of 1,340, pegged to 2024F P/E of 12.5x at -1 SD below the 5-year median.
  
  The best-case scenario from a faster pace of US Federal Reserve rate cut, stronger domestic government rollout of infrastructural projects and better-than-expected global economic growth would underpin an end-2024 FBMKLCI target of 1,815, pegged to 2024F P/E of 16.9x at 1 SD above the 5-year median.

• OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT and transportation sectors.
  
  Our top picks are Hong Leong Bank, IOI Properties, Greatech Technology, RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, IOI Properties, Yinson and Pavilion REIT.
  
  We also like other small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum.
  
  For dividend plays, we like REITS such as YTL Hospitality, Pavilion, UOA, Sunway and IGB as well as RHB Bank, Maybank, Paramount Corp, MBM Resources and CIMB Bank.
  
  Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Inari Amertron, Sunway Holdings, Gamuda, Sunway REIT, Westports Holdings and Yinson Holdings.

Source: AmInvest Research - 10 Jun 2024