Friday, July 30

2019: A year of adjustments and adaptation


After a turbulent 2018, 2019 promises to be a slightly better year for Malaysia’s corporate world, with the absence of uncertainties such as the general election held in 2018, the transition of power in the Federal Government, the introduction of several new policies, and others.

However, with the changes in policies, and several macro uncertainties still lingering on the horizon, analysts and economists remain wary of the spillovers from these unexpected events that have plagued the global markets since early 2018.

As we ring in the new year, BizHive Weekly takes a look at the early prospects of corporate Malaysia and several major sectors.

Most analysts have generally observed 2019 as a volatile year, filled with adjustments to the changes in the domestic as well as global markets.

Malaysia’s research team at CIMB Investment Bank Bhd (CIMB Research) projected a challenging and volatile year for the equity market as corporates come to terms with the new policy and political landscape post-general elections (GE14), as well as adjust to slower global growth, tighter monetary policies and the on-going US-China trade tensions

“Since GE14, the government has had to maintain a balance between meeting its election manifesto and ensuring fiscal discipline. Our economist is of the view that the priorities at the core of the new government are addressing the uneven distribution of economic gains across the population as well as rising costs of living, correcting the misallocation of economic resources and misappropriation of public funds, and strengthening institutional checks and balances and improve transparency and accountability,” it added.

Sharing its view, Maybank Investment Bank Bhd’s research team (Maybank IB Research) noted that Malaysia’s economy is expected to continue posting a sub-five per cent growth in 2019, mainly reflecting the mixed impact on – and the equally mixed outlook for – domestic demand as the economy goes through adjustments post-GE14, especially on the fiscal front, and as the moderation in global economic growth diminishes the contribution of net external demand to real GDP growth.

“With 2019 expected to be another volatile year, we retain our defensive core equity strategy. However, we also believe that with volatility, there will be opportunities, and for 2019, we believe there are pockets of opportunities for investors to trade on newsflow and thematics,” it opined.

It noted that risks to growth for Malaysia are mainly external, largely from the danger of further escalation in trade war.

On a more positive note, MIDF Amanah Investment Bank Bhd (MIDF Research) made a more favourable forecast on Malaysia’s performance in 2019.

It explained: “Clarity in domestic policy direction observed through mid-term review of 11MP and Budget 2019 will lend supports to both domestic and external sectors. The new economic direction which focuses on free market and investor-friendly will have significant impacts on overall business confidence and investment flows.”

Reaching a new normal

Overall, CIMB Research expect these changes and the on-going policy review to lead to a reset of Malaysia’s corporate earnings to a lower base in 2019 under the new normal, where government contracts are likely to fetch lower profit margins as the government moves towards open tender exercises, while competition will most likely rise in some industries which have enjoyed limited competition in the past.

“We project potential earnings risks in 2019 due to a likely weaker topline growth, upturn in loan loss provisioning for banks, as well as on-going reform policies and plans by the government to review and renegotiate contracts entered into by the previous government amounting to RM19 billion,” it added.

The research team noted that investors should watch out for other on-going domestic policy shifts in 2019 which could potentially impact corporate earnings.

“These include plans to reform the electricity industry, the introduction of the National Housing Policy 2.0, the abolishment of monopolies to lower costs, restructuring of government-linked investment companies (GLICs) and government-linked companies (GLCs), as well as the government’s plan to reduce its stake in non-strategic companies, revamping existing and introducing new taxes, targeting the listing of the world’s first Airport REIT, and on-going review and renegotiation of contracts entered into by the previous government amounting to RM19 billion,” it added.

On a wider view, iFast’s research team expect the global economy expected to clock in positive growth albeit on a lower trajectory, the prospects of corporate earnings growth is supported in 2019

As for Asia’s performance, it noted that the region is poised for returns of 20 per cent to 33 per cent over the next two years.

“Although Asia’s growth momentum has moderated lower this year, overall momentum may stabilise by the end of 1H 19, which will enable a pick-up and a recovery in corporate earnings growth across the region.

“Equity market valuations have improved across Asia and we believe that a large portion of the known negatives out there are already factored into current prices, allowing investors an opportunity to take advantage of lower prices at the current juncture.

“Corporations may readjust their operations across the region and countries in Southeast Asia will benefit from geographic proximity to China and as regional trade continues to increase,” it explained.

With that, BizHive Weekly delves into the prospects of several major sectors in Malaysia:

A year of opportunities for heavy industries

Aviation: Passenger growth to remain positive

Despite the on-going conflict between AirAsia Group Bhd (AirAsia) and airport operator Malaysia Airports Holdings Bhd (MAHB) on the Passenger Service Charges (PSC) issue, analysts believe that the aviation industry will still continue to see positive passenger growth in 2019.

MIDF Research noted that year-to-date, passenger traffic in Malaysia grew by 1.9 per cent year-on-year (y-o-y), charting upward trajectory since September 2016.

“Thus far, the increase in demand was steered by an improvement in international traffic which has grown by 5.3 per cent y-o-y for the first 10 months in 2018. While we are cognizant of the departure levy on international outbound passengers taking effect from June 2019 will encourage people to travel within Malaysia, sensitivity towards the increase in PSC for international destinations has always been historically minimal. Moreover, we opine that the overall tourism initiatives outlined in Budget 2019 could uphold the demand in the nation’s tourism sector, supporting the overall load factor at MAHB airports.

“Also, with AirAsia’s capacity expansion plan of adding 10 aircraft in FY19 which utilizes fuel saving aircrafts via the group’s digitalisation strategy coupled with more international routes will lend support to the passenger growth in Malaysian airports which is forecasted to reach 104 million pax in FY19,” it added.

On the flip side, Maybank IB Research noted that airlines have been cautious in deploying new capacity and this would likely transcend into 2019.

However, it opined: “We view this capacity restrain positively, as it ensures a high industry load factor and stable yield environment.”

Other key look outs in 2019, according to Maybank IB Research, include details of the Regulatory Asset Based (RAB) model for MAHB which are expected by the third quarter of 2019 (3Q19) and this could be followed by details for an Airport REIT which was announced in Budget 2019.

Oil and gas: Mixed year ahead

Analysts retained their mixed views on the oil and gas (O&G) industry’s performance this year as several global factors could still disrupt its positive trend seen since last year.

“As the oil price dropped recently, we have yet to see any impact on the upward contract award trajectory with Malaysia’s 9M2018 contract awards rising 26 per cent y-o-y to RM7.5 billion due to the award of Pan Malaysia umbrella contract renewals, Sapura Energy securing the EPCIC work for the Pegaga CPP and Serba Dinamik’s EPC and O&M jobs. Offshore projects in Brazil, Mexico, the Middle East and West Africa may still be poised to gain traction with Sapura and MMHE recently being selected for Saudi Aramco’s Long-Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150 billion over the next 10 years,” AmInvestment commented.

Meanwhile, MIDF Research, which pegged a ‘neutral’ view on the O&G upstream segment but a ‘positive’ on the industry’s downstream segment, noted that up to August 2018, Malaysia’s crude oil production averaged 653.6 thousand barrels of oil per day (kbpd), up from 649.4kbpd the same period of 2017 – in line with the higher global demand for crude oil.

“We opine that this trend will persist going forward as we expect higher demand for crude oil price at 100.8mbpd in 2019. In addition, as the Malaysian crude oil (Tapis, Labuan, Miri, Kikeh, Dulang, Bintulu) predominantly trades at the premium compared with global benchmark Brent, the selling prices since October 2018 has averaged above USD60pb despite the decline in global crude oil price to below US$60 per barrel recently.

Hence, we expect that this will continue to act as a buffer for Malaysia’s petroleum company Petroliam Nasional Berhad (Petronas) in planning for its exploration and production (E&P) activities in 2019,” it said.

It further highlighted that upstream oil majors consisting global integrated oils and independent E&P companies are expected to increase their capital expenditure (capex) in 2019 due to multiple years of suppressed capex spendings in 2015 and 2016.

However, it noted, “Many E&P projects, particularly those involving deep water ventures and unconventional oils have been either postponed or shelved due to unviable economics. On average, approximately 30 to 40 per cent of E&P capex is allocated for drilling and completion while around 15 to 20 per cent for subsea production.”

Automotive: Change on the horizon with new national policy

This year is a year of change for the automotive sector as the National Automotive Policy (NAP) 2019 is expected to be announced in the first quarter of 2019 (1Q19).

This new policy is set to serve as a roadmap for the automotive sector in the next four years and analysts have pegged this announcement as something to look out for which could become a majro catalyst for the sector.

Maybank Investment Bank Bhd’s research team (Maybank IB Research) highlighted: “(NAP 2019) could bring the industry forward in energy-efficient/electric vehicle adoption, and additional measures (vehicle inspection), leading up to a possible end-of-life vehicle (ELV) policy.

“We expect also standardised incentives for auto players (such as tax, duty reduction) with productions in EEV/EVs.”

AmInvestment Bank Bhd’s research team (AmInvestment) noted that with the emphasis on energy efficient vehicles and focus on four key areas which are connected mobility, Industrial Revolution 4.0, new generation vehicles and artificial intelligence, the new NAP will also factor in the plan for the third national car, which has reportedly received over 20 proposals and will be led by the private sector.

“We understand that the NAP could also set a bigger stage for local suppliers to serve export markets as there are fewer barriers to entry for auto components compared to CBU cars,” it added.

On the other hand, the research team at MIDF Amanah Investment Bank Bhd (MIDF Research) said the upcoming NAP could bring about some uncertainties as it could involve measures to support a potential third national car.

“Plans are still sketchy are this point, but in the case of significant incentives for the new national car’s models (such as EVs) in the form of taxes or barriers for the non-nationals, this could somewhat alter the current landscape. That said there is also the issue of competing with the existing two national cars, positioned in the lowest segments of the market, which accounts for half of TIV,” the research team

Construction: A year of adjustments as uncertainties still plague major projects

Following the transition of power last year and the new Federal Government’s cost-cutting agenda, many major infrastructural projects are still chopping the block while many others still face the several obstacles which could hamper its progress.

Maybank IB Research commented: “The drag on public expenditure in public investment which we expect to contract further by 4.5 per cent in 2019 after the projected 5.3 per cent decline in 2018, mainly reflecting the impact of cost reviews as well as the cancellations and postponements of major infrastructure and development projects.

“On-going and planned high-impact infrastructure and development projects will continue but subject to cost reviews as well as contract re-negotiations/re-tendering to ensure value for money in terms of these projects being implemented at realistic – rather than inflated – costs associated with leakages, wastages and excesses.

“Furthermore, the jump in Federal Government’s net development expenditure to RM54.3 billion in 2018 and RM54 billion in 2019 compared with RM43 billion in 2017 is due to reclassification of items previously treated as operating expenditure such as payments to Prasarana for LRT construction and to Suria Energy Resources for the cancelled Trans Sabah Gas Pipeline and Multi-Product Pipeline projects; lease or maintenance payments for the construction of police buildings and capital refurbishment of schools. These reclassifications totaled RM6.9 billion in 2018 and RM9.7 billion in 2019.”

Analysts have also generally viewed the construction sector as going into a ‘downturn period’ due to the new administration’s move towards fiscal sustainability which could highly result in a subdued project awards.

Over the next 12 months, AmInvestment Bank said, it expected public projects that are to be rolled out to largely comprise smaller scale/value-for-money basic infrastructure projects such as road upgrading, bridges, schools, drainage, rural water and electricity supply and smallish sewerage schemes.

“The only segment that may see the rollout of larger work packages is the rail sector by virtue of the RM2.46 billion allocation under Budget 2019 for the upgrading of rail tracks, including Phase 2 of the Klang Valley Double Track (KVDT) project,” it noted.

On a more positive note, MIDF Research pegged a more favourable view on the sector prospects particularly on the development of several major projects in East Malaysia.

It said: “We expect construction works mainly for MRT2, LRT3 and Pan Borneo Highway (Pan Borneo) to pick up pace soon following the green light granted (by government) to complete the projects. Despite a significant cost reduction for MRT2 and LRT3, the amount was still significant at RM41.5 billion combined, providing earnings visibility beyond 2020.

“On Pan Borneo, we have seen some improvement in revenue recognition by the related contractors namely KKB Engineering and Cahya Mata Sarawak. Moving forward, we expect the recovery on investors’ sentiment will be heavily weighted by the development potential in East Malaysia.

“In 2019, we expect the pending implementation of mega projects especially in Sarawak will likely provide a boost on the state’s construction outlook. The potential roll out of Sarawak infrastructure packages includes The Coastal Road, the Second Trunk Road and the state’s water grid projects worth RM9.1 billion.”

Maybank IB Research had also highlighted that with both the 11MP Mid-Term Review and Budget 2019 focusing on rural and public infrastructure development, focus could be on Sarawak from the rollout of key infra projects such as the Sarawak Coastal Road and Second Link Road (estimated at RM6 billion) and State Water Grid (estimated at RM2.8 billion).

“These projects will be, in part, funded by the record Sarawak State Budget of RM11.9 billion for 2019 announced in November 2018, of which RM9.1 billion has been set aside for development spending. This is in addition to the RM4.3 billion allocation by the Federal Government for the development of Sarawak under Budget 2019,” it added.

All in, MIDF Research said, despite the recent cancellation and deferment of mega projects, the anticipated drag to the sector is less than initially thought.

“While certain review exercise on mega projects have put a strain on sentiment, we believe the sector’s long term outlook will be driven by sustainable measures. We are encouraged to see that meaningful allocations were secured, giving reasonable attention to residential, non-residential, social amenities and infrastructure developments,” it added.

Transportation: A neutral year

Analysts are generally ‘neutral’ on the prospects transportation sector, consisting of logistics, shipping, and ports, as uncertainties still surround the petroleum tankers segment despite positive prospects observed for the ports and logistics segment.

MIDF Research noted that the booming e-commerce industry is expected to continue to drive growth for last-mile delivery companies such as Pos Malaysia Bhd (Pos Malaysia), GD Express Carrier Bhd (GDEX) and Tiong Nam Logistics Holdings Bhd (Tiong Nam).

“The local e-commerce industry is projected to register a 20.8 per cent growth by 2020. We view that this will entice more last mile deliveries companies especially start-ups to pursue strategic tie up with the various e-commerce companies which could potentially lead to intense price competition,” it said.

The research team pointed out that existing last-mile delivery companies may need to revise downwards the delivery fee in order to remain competitive.

“As a result, we observed that both GDEX and Tiong Nam’s profit margin has reduced to single digit in the latest quarterly earnings (3Q18),” it added.

Meanwhile, AmInvestment believed the key driving forces for the e-commerce industry are the trend towards online shopping and an expanding peer-to-peer economy.

“Consumers are attracted to online shopping due to price advantages, product range and its sheer convenience. The rapidly expanding e-commerce sector has created huge opportunities for parcel delivery service providers such as Pos Malaysia. Also, Malaysia’s presence in the regional and global e-commerce market is on the cusp of a quantum leap, driven by the Alibaba-backed Digital Free Trade Zone (DFTZ) project in the KLIA Aeropolis.

“The DFTZ will serve as a regional e-fulfilment centre (virtual zone) as well as an e-commerce logistics hub (physical zone). Apart from MAHB (the landowner and developer of the KL Aeropolis), we believe local logistics players (including warehouse operators) are poised to garner a slice of the action in the DTFZ physical zone,” it added.

As for port operators, analysts have generally viewed the segment positively, with AmInvestment saying it is more upbeat on Westports in 2019 with a projected throughput growth of four per cent as compared with two per cent estimated for 2018, assuming that the lip service and leg work provided by the government will pay off.

“Transport Minister Anthony Loke will soon meet up with the management of Cosco Shipping Corp Ltd to entice the Chinese shipping giant to make Malaysia its transhipment hub in the region. Also, despite the US-China trade war, regional trade activities, especially the electrical and electronic (E&E) segment, are expected to remain robust,” it noted.

CIMB Investment Bank Bhd’s Malaysian research team (CIMB Research) expected Westports to deliver volume growth from 2018 onwards as it has recovered from changes in the container shipping alliance structures.

“We are forecasting 4.5 and 5.4 per cent y-o-y volume growth in 2018 and 2019, respectively. This compares favourably with the 9.3 per cent y-o-y decline in 2017.”

It also noted that other catalysts include the improvement in Malaysian consumer sentiment and the imports of polymer resins and plastic/paper waste into Malaysia, which should further lift throughput. Aside from that, it said, Westports could benefit from a 13 per cent gateway tariff hike scheduled for March 1, 2019.

“The long-term outlook for Westports is bright as it has secured approval for an expansion that will double its port capacity to 30 million teus per annum by 2043, in our estimate,” it forecast.

As for the petroleum shipping segment, analysts are less optimistic on its prospects.

CIMB Research commented: “While the LNG segment may improve next year, with further upside from more contract wins from the heavy engineering and offshore arms, MISC may have to bear the burden of compliance with IMO 2020, which will increase MISC’s fuel costs. In all likelihood, MISC will not be able to pass through the higher operating costs in full.”

MIDF Research also noted: “We view that the number of existing tankers which is scheduled to be decommissioned in 2019 is far below the new incoming tankers.

“In addition, output cuts agreed by the OPEC and Russia to remove 1.2 million barrels per day from the market could depress demand for petroleum tankers.”