GE13: The days after

Malaysia’s much awaited 13th General Election has finally come to a close and the incumbent ruling party, Barisan Nasional (BN) has successfully returned to power. With all the election uncertainties dissolved and a refreshed government back in place, BN’s victory should welcome back a sense of relief for investors. Nevertheless, the market could still encounter some hurdles as the country’s political uncertainties may still persist. Different sectors may experience different impact post-elections as well, pending the green light for certain projects to resume. The ringgit and FBM KLCI has also experienced its share of ups and downs during this period as well.

BizHive Weekly captures a few observations on the outcome of Malaysia’s 13th General Election:

Relief over polls outcome but obstacles remain

With the 13th general elections now behind us, the country’s financial markets are expected to return to “business as usual” with renewed hopes of a stable, smoother economy as the incumbent ruling coalition – Barisan National (BN) – assumes the reins of government over the next five years.

BN won by a slightly lesser majority than the 12th GE (GE12) in 2008, scooping up 60 per cent of the 222 Parliament seats contested – lower than its 63 per cent majority (140 seats) captured in GE12.

Analysts across the board were not surprised by the outcome of the GE13 which saw ruling BN emerging victorious with a lesser but nonetheless, comfortable working majority.

While BN’s victory should welcome back a sense of relief for investors,  the market could still encounter some hurdles as the country’s political uncertainties may still persist.

A manifesto to deliver

BN’s slim victory has undoubtedly given rise to the urgency to implement the ETP projects and policy reforms without delay or disruptions.

“Political continuity and policy are certainly positive in sustaining the investment growth momentum on the dilution of implementation or execution risk in major infrastructure projects and in the committed or approved investments already in the pipeline under ETP, regional economic corridors (such as Iskandar Malaysia), Petronas’ capital expenditure plan and Malaysian Investment Development Authority (Mida) approved investments,” the research arm of Maybank Investment Bank Bhd (Maybank IB Research) said in a research note.

As highlighted in a research note by analysts Terence Wong and Lee Heng Guie of CIMB Investment Bank Bhd’s research division (CIMB Research): “Broad policy continuity under BN should sustain Malaysia’s growth momentum over the medium term. ETP will continue to support private investment growth which had been respectable in recent quarters.”

Nevertheless, the economists cautioned that the country’s growth potential will ultimately depend on the extent of compromise over its reform agenda in the near term.

In this regard, Kenanga Research’s analysts observed that while BN’s victory might have paved way to smoother implementation of ETP projects and policy reforms, given the criticism and pressure to wipe out corruption and review the archaic affirmative action policy, the onus was on BN to make the necessary changes and ensure key infrastructure projects were dished out fairly and completed on time with minimal cost overruns.

“It also needs to put in extra commitment to spruce up the efficiency of the public service, reduce crime rate and reform the national education system,” they added.

With global economic uncertainties still a problem to be reckoned with,  BN could be facing a big challenge in sticking to its election manifesto. Furthermore, BN’s reform momentum could hit a snag, CIMB Research’s economists Wong and Lee opined.

“Without a strong mandate from the people as well as potentially months of political infighting after general elections, some of the policy reforms could be put on the backburner or progress slowly. This will throw off the government’s reform credibility and dent investors’ confidence in the sustainability of the country’s growth momentum.

“Unpopular measures such as the goods and services tax (GST) and subsidy cuts could be delayed on worries of political backlash.

“To gain political mileage, more populist measures, including cash transfers, could be in store, and if not accompanied by earlier planned tax reforms and subsidy rationalisation, the country’s fiscal-reduction plans could be at risk,” they pointed out.

This could pose a great challenge for BN as it could potentially further raise the fiscal operating expenditure (opex) in the near and medium term, Kenanga Research’s analysts said.

They noted that the fiscal opex reached a record high of RM205.5 billion in 2012, up 11.5 per cent or 21.9 per cent of Malaysia’s gross domestic product (GDP).

“At the rate the government is spending and dishing out funds, we will not be surprised to see the opex probably increasing by another five to 10 per cent this year as opposed to the official target of a reduction of 0.3 per cent.

“To mitigate the rise in opex, it all depends on how soon the government willresume its planned fiscal consolidation, mainly by reducing subsidies,”  they said.

However, ample liquidity and relatively large domestic resource surplus should continue to cushion the capability and flexibility of the government to fulfill its election promises while implementing expansionary measures  to support growth without crowding out private sector lending.

Post-GE fever, what’s next?

BizHive Weekly takes a look at the various sectors post elections

MANY projects in the various sectors are slated to continue in  the post-election period.

Some projects, started under the 10 Malaysia Plan (10MP) and Economic Transformation Programme (ETP), are due to be completed within the next few months.

Certain policies within selected industries such as the National Automotive Policy in the automotive sector and the B5 policy in the plantations sector will make major changes.

Automotive

Maybank Research believes positive consumer sentiment will continue for big-ticket item purchases, supported by BN’s manifesto to gradually reduce car prices by 20 to 30 per cent.

On the neutral front, Kenanga Research’s Chan Ken Yew said the revised National Automotive Policy (NAP), which is expected to be unveiled by mid-2013, will focus on positioning the country as a regional hub for hybrid vehicles and energy-efficient vehicles (EEV).

“This will include measures and incentives to promote the growth of EEV,” he said.

“It was reported that the new policy would also look into gradually eliminating the structural issues such as high duties, high selling prices, non-tariff barriers, fuel subsidies and other political considerations.

“Thus, the revised NAP should be positive for all the auto players, especially DRB-Hicom Bhd and UMW Holdings Bhd as both will benefit from their partnerships and affiliations with foreign carmakers which can be developed into further tie-ups and collaborations,” he added.

Banking

The restoration of business and consumer sentiment will be positive for loans growth and capital market activities with Economic Transformation Programme (ETP) said to start flowing again.

Chan noted that the capital market would no longer be clouded by the election risk and that the banking sector rally is like to be sustained.

“Some of the laggards should, hence, catch up in their performance in the future. Our view is underpinned by the buoyant domestic economy where we remain convinced that an infrastructure investment cycle is underway in Malaysia.

“The balance sheets of domestic banks are largely Basel III ready, the liquidity of the market is good and the asset quality of the industry is solid.”

Before the election, Cheah King Yoong from Alliance Research Sdn Bhd (Alliance Research) maintained his neutral recommendation of the sector and continued to impose 10 to 20 per cent discount onto the banking stocks under his coverage although he observed external risks had dissipated recently.

“This is because we are of view that any potential change in political landscape could disrupt the execution of projects under the ETP and implementation of policy reform going forward, which consequently impact the domestic economy and banking sector,” he said.

In view of the continued mandate given to the Barisan National in 13GE, Cheah believed the potential political uncertainties arising from such event is fast dissipating.

As such, he upgraded the domestic banking sector to “overweight.”

Building Materials

Maybank Research noted that the implementation of major infrastructure projects under BN manifesto will provide long-term volume visibility for both steel and cement.

“However, steel’s average selling prices (ASP) could still track the lacklustre international ASP while valuation for the more liquid Lafarge in cement is just about fair,” it said.

Chan from Kenanga Research was also cautiously optimistic on the outlook for steel players despite the fact that the challenging operating environment could be lifted by the recent low raw material prices coupled with the strong local demand, which could help steel players to turn around in the second half of 2013.

 Construction

This sector is the key industry under focus with the implementation of major infrastructure projects under the Barisan Nasional manifesto such as the Klang Valley Mass Rapit Transit 2 and 3, Kuala Lumpur-Singapore High Speed Rail, North South Expressway expansion, West Coast Expressway (WCE), Sarawak’s Pan Borneo Highway and so forth providing long-term jobs visibility.

“It is rather obvious with the success of BN in the election, the economic programmes, initiated by the government previously such as ETP and 10MP, will continue,” Chan noted.

“We believe the construction sector will continue to record robust growth in the foreseeable future — at least for the next five years.

“All the mega projects earlier planned should resume and hence provide a clear order book replenishment visibility for contractors.”

So far, the construction stocks have reacted positively to the news.

KL Construction Index hit its 52-week high on May 6 – the day after the elections – with top gainers including Gamuda, IJM Corp and WCT.

“This certainly tells us that investors’ confidence in the sector has been regained as it is no longer imputing any risk premium which is typically attached to political uncertainties,” Chan said.

Earlier planned contracts will be awarded and while timing of awards is not clear, we do expect this to take place soon, which provides a clear order book replenishment visibility for contractors.

“Hence, we expect the construction sector to continue to register robust growth in the medium term of up to five years,” he added.

“Note that order book continues to run, thereby providing clear earnings visibility. We estimate the listed contractors have a running order book of circa RM45 billion or more.

“With no changes to the incumbent government, we expect the progress of order book to run smoothly for the next three to four years at the very least — which does provide us with brighter earnings visibility as delays in earnings will be reduced.”

Gaming

Within the gaming sector, no new casinos or number forecasting operators (NFOs) were expected to enter the gaming industry any time soon.

There was no indication of higher statutory tax rates (such as casino tax, gaming tax, betting duty) either, Chan noted.

“However, the KL-Singapore high speed link will be a boon for Genting Bhd as it will make it easier for Singaporeans to gamble in Resorts World Genting and Malaysians to gamble in Resorts World Sentosa.”

Oil & Gas

Another sector set to see robust spurs is that of oil and gas with Petronas’ capital expenditure (capex) spending and the Refinery and Petrochemical Integrated Development (RAPID) complex to go ahead and more projects to be rolled out.

Kenanga Research’s Chan noted the sector is likely to go full throttle as the government relies on the sector to promote continuous activities and Petronas will still aim for continued aggressive capex spending in its bid to stem domestic reserves and production declines.

“We believe the contracts to come up will be the Pan-Malaysia hook-up and commissioning (HUC) contracts, further inspection, repair and maintenance contracts and drilling contracts.

“We believe the marginal field contracts will also start to emerge which will prompt further excitement towards the sector.”

AmResearch Sdn Bhd (AmResearch) underscored the importance for the rollout of the HUCC contracts for the continuation of the excitement in the O&G sector, given that fabrication contracts domestically had slowed due to the complexities of the new projects underway.

“While we still expect the award of the Semarang CPP engineering, procurement, construction and commissioning contract in June this year to Sapura Kencana, the rollout of the second phase of the North Malay basin gas cluster project, which will involve a large CPP at the Bergading field and multiple satellite well-head platforms, could be deferred towards the end of 2013.”

Property

Yee Mei Hui from HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) does not expect major changes in key policies for the property sector as federal and state governments for major markets (KL, Selangor, Penang, Johor) remain status quo post-elections.

“Launches should resume while sales should pick up as uncertainty dissipates as both developers and buyers have been holding back for the past six months. Project approvals are also expected  to accelerate,” she said.

These factors should help re-rate the Malaysian property sector’s valuation now hovering between historical average and +1 S.S.

Developers have been major laggards (until recently) compared to MREITs which outperformed them last year.

The recent run-up in the KL Property Index was mainly driven by Iskandar Malaysia beneficiaries but should now broaden out to other segments.

Under the property sector, high-beta developers are expected to outperform the market post-elections as the sector is due for a rally given its valuation consolidation over the calendar year 2012.

Additionally, positive news flow – Iskandar Malaysia, Iskandar Waterfront Holdings Sdn Bhd’s (IWH) listing, the Kuala Lumpur-Singapore high-speed rail, Circle-Line Mass Rapid Transit award and the Tun Razak Exchange, to name a few – will keep the sector buoyant.

“We are particularly bullish on Iskandar-related developers and laggards and expect the re-rating to continue. We have narrowed our average sector discount to a fixed deposit revalued net asset value from 22 per cent to 17 per cent,” noted Chan of Kenanga Research.

Consumer

Spurred by rakyat-friendly measures such as the annual Bantuan Rakyat 1 Malaysia, civil servants’ transformative salary scheme and so forth under the Barisan Nasional manifesto, the consumer sector is pegged to be continuously supported by the consumption of staples.

However, this is expected to be offset by potential excise hikes in cigarettes and brewery, and the implementation of the goods and services tax to “part-finance” these measures.

“We foresee the sector undergoing a de-rating owing to its rich valuation, especially on the bigger cap stocks,” Chan highlighted.

“This is mainly due to the fact that their flattish earnings and regular dividend payouts will not have enough sparks to catch attraction under the ‘high beta world’.”

Education

Despite escalating competition in the private higher education institution space fuelled by the growing number of players at the university level, the upcoming lucrative international school segment will still provide the sector a much-needed boost.

However, the sector’s defensive nature may not be the preferred sector for now.

Gloves

Kenanga Research expected the sector to remain resilient, underpinned by solid demand for rubber gloves as a higher sales volume is expected to be led by latex gloves although nitrile gloves, which had consistently been taking up the former’s market share, will continue to show better growth prospects.

“It will be underpinned by potential pent-up in demand for examination rubber gloves due to the recent H7N9 bird flu virus which could further highlight the importance of hygiene as well as defensive and captive earnings stream nature of the of rubber glove industry.”

Healthcare

The healthcare industry in Malaysia is expected to continue to see stable growth, supported by a growing healthcare expenditure, rising medical insurance and aging population demographics.

The healthcare services sector earnings are considered defensive, considering their high predictability and captive earnings streams.

Plantations

The laggards within this sector are expected to perform better, Kenanga Research’s Chan noted, speculating a likely upgrade for the sector to neutral.

“Our sector downgrade to underweight on December 4, 2012, has been proven correct so far as the KL Plantation Index appreciated only 1.4 per cent (as compared to FBM KLCI, which has gained 5.9 per cent),” Chan attested.

Although he thought the coming May (index) results will be disappointing, he also believed the downside was well supported by the high liquidity in the local market.

“In addition, we think crude palm oil prices are already close to bottom and we believe they will not fall below RM2,000 per metric tonne as the bigger implementation of B5 in Malaysia should limit the inventory increase,” he said.

“We believe laggards within the plantation sector should perform better.”

 Technology

The technology sector has seen many ups and downs these past few years, caused by the floods in Thailand and the Japanese earthquakes, derailing the hardware supply system worldwide.

As such, a cautiously optimistic outlook has been pegged for this sector’s recovery in Malaysia with Kenanga Research’s Chan opining that the near-term outlook for local tech companies could continue to be overshadowed by a sluggish personal computer demand coupled with the prolonged global economic uncertainties.

“We believe the industry recovery is likely to  be seen earliest by the second half of 2013, underpinned by a recovery in the global chip demand amid a better global economic condition.”

Transportation and Logistic

Meanwhile, business will be as usual for the transportation sectors such as land transportation, aviation and shipping magnates as they are unlikely to be impacted by any policy changes, given that their businesses are driven by global macro environment factors.

In fact, it is believed the election period would have benefitted the land transportation and airlines players as people from abroad had travelled home to vote.

Stock market rebounds, positive on stable economy

On the stock market front, most analysts expect the market to react positively in a long run, based on the outcome of GE13.

It is to be recalled that before GE13, most investors decided to either remain on the sidelines and play the wait-and-see game or tread cautiously in the market.

As such, FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) lingered under 1,750 points during that time.

The FBM KLCI, however, rocketed by triple-digit to an intraday record high of 1,826 points on Monday morning after the elections, MIDF Research’s head of equity research Syed Muhammed Kifni observed.

To recap, the FBM KLCI climbed to 1,747.85 and rose as much as 7.8 per cent during the day – the most in more than a decade.

All 30 stocks in the KLCI index rose, led by a 12.9 per cent rally in UEM Land Holdings Bhd and a 10 per cent gain in CIMB Group Bhd, the MIDF Research analyst noted.

It was possible the market was focused on the reduction in political-risk premium.

“The FBM KLCI earlier suffered from ‘pre-election discount’,” explained Muhammed Kifni in observing the stock market.

“Recall that, in mid-January, the FBM KLC was bashed down by bouts of selling, likely triggered by jittery investors worried the GE13 would unfavourably alter the political status quo. Consequently, the local benchmark decoupled with the rest of the regional markets, attested by its gaping ‘pre-election discount’.”

However, Muhammed Kifni highlighted, in the research firm’s strategy report, dated January 22, 2013, that the firm alluded to the empirical market behaviour by stating “while the local market performance may temporarily decouple from the rest of the region, it would soon re-track the broad regional trend direction.”

In its true fashion, by early May, the FBM KLCI successfully re-tracked the broad regional trend direction. Furthermore, the post-GE13 ‘relief rally’ has more than erased earlier lost ground relative to its regional counterparts.

With regards to post-GE13 ‘relief rally’, Muhammed Kifni said it was not unexpected.

“In our strategy report, dated May 3, 2013, we spoke of the likelihood of post-election market frenzy but also cautioned on its near-term fundamental underpinnings: FBM KLCI year-end 2013 target of 1,750 points under review.

“We also took cognizance that GE13 on May 5 may return the incumbent to power, hence providing a great fillip to market sentiment the following week.

“Thus, the market may experience a ‘relief rally’ towards 1,800 points or even beyond. Nonetheless, we need to carefully weigh between potentially reduced political risks against the expected tepid earnings growth going forward.”

He further cautioned the post-election may soon give way to more mundane fundamental considerations relating to earnings, growth and valuation.

Meanwhile, Muhammed Kifni outlined that FBM KLCI seldom exceeded price earning ratio (PER) of 16.4-fold or 1.0 standard deviation (SD).

“During the past seven years, there were only two periods – 2007 and 2009 – where the PER (current) of FBM KLCI exceeded 16.4-fold or 1.0 SD level,” he noted.

However, this will not be the case if the FRM KLCI is supported by sheer liquidity or rising expectations.

The MIDF Research analyst said: “Almost all risk-asset markets the world over were in patently bullish mood (fuelled by banks’ balance sheet expansions) in 2007 while were utterly oblivious of the then imminent danger ahead.

“Hence the above normal PER valuation in that year on the backdrop of modest FBM KLCI on-year earnings growth of 9.9 per cent was, on hindsight, unreasonable but yet quite understandable.”

He further explained that “a combination of low base-effect of current year earnings and escalating forward earnings growth expectations, have resulted in the above average PER in 2009. Nonetheless, the above average valuation in that year was totally reasonable.”

On the outlook of FBM KLCI, Muhammed Kifni was of opinion that performance would likely be tame post election, saying: “Current growth prospects limit FBM KLCI retainable upside at 1,790 points in 2013.

“At this juncture, both current and forward consensus earnings estimates are pointing towards relatively tame growth prospects. Thus, by empirical measures, we should not expect the FBM KLCI to be able to retain an upsurge of beyond the 16.4-fold or 1.0 SD level.”

In other words, the analyst pointed out that based on consensus current year earnings per share (EPS) of 109.06 points, the valuation-based ceiling for the local benchmark in 2013 is currently pegged at 1,790 points.

Muhammed Kifni adjusted FBM KLCI year-end target to 1,800 points.

“An adjustment to our market target is warranted post-GE13 due to reduced political uncertainties, and slight upward-bias to corporate earnings expectations,” he said.

Meanwhile, in a separate research note, Maybank IB Research reckoned that the market would sustain its positive reaction post-GE13.

It also expected it resume its uptrend on continuition in policy direction with no impact on economic growth while businesses could start to reinvest while consumer sentiment should stay positive.

“Supporting the KLCI’s uptrend will essentially be greater clarity and stability, at the political and policy fronts, strong domestic economics and corporate balance sheets, continuous corporate earnings growth, and the KLCI’s underperformance (increase of 0.3 per cent year to date) versus regional markets, for the second year running, on political risk,” it added.

On the other hand, analysts Terence Wong and Lee Heng Guie of CIMB Research remained cautious on the outcome of GE13.

They noted: “Overall, the 13th elections can be considered mildly positive for the stockmarket as a comfortable win for BN reduces the odds of a repeat of the shocking 12th general elections in 2008 when the KLCI hit limit-down and circuit-breakers kicked in for the first time ever.

“Also, the KLCI has already significantly underperformed regional markets in 2012 and YTD in 2013.

“Furthermore, the rumour mill went into overdrive during the last days of the campaigning period, speculating about BN’s potential poor performance, and domestic investors were bracing themselves for any outcome.”

However, they expected some stockmarket volatility in the short term on the back of possible political uncertainties in the coming months.