As Prime Minister Ismail Sabri Yaakob’s announced the dissolution of the Parliament on October 10 with the consent of the Agong, this paves the way for GE15 to be held in the last quarter of 2022. — Bernama photo
AS Prime Minister Ismail Sabri Yaakob’s announced the dissolution of the Parliament on October 10 with the consent of the Agong, this paves the way for the 15th General Election (GE15) to be held in the last quarter of 2022, which has been much anticipated by industry observers.
On Thursday, the Election Commission revealed that candidate nominations will take place on November 5, providing a 14-day campaigning period with the polling date on November 19.
For the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), it had not been much of a surprise that GE15 has been called this year.
“Although we believed that it was more opportune to hold it next year, we did not discount the possibility of it being called this year,” MIDF Research said in its analysis on this political update.
“This stems from a few events that happened such as the Registrar of Societies allowing UMNO to amend its constitution to hold party election six-month after the GE, and the strong win by Barisan Nasional (BN) in the last two by-elections; in Melaka and Johor, which increased the confidence of those within UMNO that BN could win a comfortable majority in the GE.
“There is also the notion that there will be a low turnout if GE is called this year which would benefit BN. However, based on recent data, this could be a fallacy.”
On whether there is any potential market impact in the run-up to GE15, analysts saw that investors were more wary on the aftermath of the election.
“The conventional wisdom was that our market would get excited with the mere mention of a general election.
“However, ever since the 2000s, we observed that market performance – reflected in the FBM KLCI – prior to an election have been mixed, and price action seems to come in after an election.”
MIDF Research recapped that there was a relief rally such in 2013 after the concerns that there might be a change of government then but BN eventually won, and poor market performance in 2008 and 2018 due to negative surprises; BN lost two-third majority for the first time and change in government respectively.
“Only in 2008 that there seems some sort of a ‘election play’ but on a negative trend as there were murmurs that BN will lose its two-third majority – which it happened so.
“We believe investors are now more concerned about the resultant (political, societal, and economic) stability post-election, and less on pre-election goodies and promises.”
While GE15 may excite politically, for the equities market, MIDF Research expects external factors to continue hold sway over equity market sentiment.
“These are aggressive monetary tightening by major western central banks, the Russia-Ukraine war and China economic conditions.
“We expect that GE15 will only add to the uncertainty and may affect sentiment negatively.”
In this regard, the research arm foresees a situation whereby the local equity market valuation would remain at below normal historical range particularly due to the consequence of US Fed extended aggressive tightening on world’s financial liquidity.
“Additionally, equity valuation could also be impacted by higher risk attached to earnings forecasts corresponding to heightened economic uncertainty worldwide.”
Meanwhile, RHB Investment Bank Bhd (RHB Investment Bank) saw that looking at the past five general elections for market trends is somewhat inconclusive, as elections are just one of many factors influencing the tone and direction of the market.
“An analysis of sectoral performances over past election cycles also do not draw out clear winners and losers,” the research firm said.
“A hung parliament that degenerates into another constitutional crisis would be a negative outcome for markets, given the leadership and power vacuum that would ensue.
“While the Anti-Party Hopping Bill has been enacted, side deals and horse-trading between the various political groupings will have highly unpredictable outcomes.
“If a weak political leadership emerges, this would result in a government that will likely be unable to bring about the sorely needed long-term reforms, while questions over its longevity would be negative for markets, including foreign investors.
“Conversely, a government with a strong majority post-GE15 would be the preferred outcome for investors.
“Nonetheless, markets will want to see adherence to good governance principles and the rule of law.”
All in, RHB Investment Bank expects that positive political outcomes from GE15 would only have a short-term influence on markets whose fundamental outlook remains dependent on the evolution of the global macroeconomic environment.
BizHive highlights a few sectors to keep an eye out for in the run up to GE15:
Capital A’s fares per stage length are largely stable regardless of distance, analysts observed. — Bernama photo
GE15 turning tides for aviation players
THE aviation sector, specifically Capital A Bhd (Capital A), is set to benefit from an increase in passenger traffic during the GE season as voters return to their voting constituencies to vote.
“Taking a leaf out of history, we expect GE15 to have a long term positive impact on passenger traffic and a short term positive impact on airfares,” the research arm of Maybank Investment Bank Bhd (Maybank IB Research) said.
“History has taught us that passenger traffic tends to rise during GEs as voters return to their voting constituencies to vote.
“This is especially true for voters whose voting constituencies are across the South China Sea in Sabah and Sarawak.
“For Malaysia Airports Holdings Bhd (MAHB), domestic passenger traffic grew 18 per cent in 2013 (GE13) and three per cent in 2018 (GE14).
“For Capital A, AirAsia Malaysia passenger (MAA) traffic grew 11 per cent in both 2013 (GE13) and 2018 (GE14).”
As such, the research arm expects GE15 to exhibit similar trends.
“What intrigues us further is that the rise in passenger traffic in the past appears to be structural. In other words, passenger traffic does not ease post-GEs but stabilises or even continue growing.”
That said, Maybank IB Research also opined that GE15 may have a lesser impact on the sector, compared to previous elections.
According to the research arm, there was also growth in airfares during GEs but they did not last long.
“To be sure, we gather that GE15’s impact on the Malaysian aviation sector may be less potent this time around. One, voter turnout may not be as high as GE13 (80 per cent) and GE14 (76 per cent).
“At press time, Pakatan Harapan is still deciding whether to dissolve the state assemblies of Penang and Negeri Sembilan after deciding not to dissolve the state assembly of Selangor while Islamic party PAS stated that it will not dissolve the state assemblies of Kedah, Kelantan and Terengganu.
“Moreover, Sabah and Sarawak already held their state elections in September 2020 and December 2021 respectively.
“Two, voters may be dissuaded from flying to their voting constituencies due to currently high airfares.”
To be sure, Maybank IB Research does expect both MAHB and Capital A to benefit from GE15.
“That said, we expect Capital A to benefit more than MAHB. This is because Capital A’s fares per stage length (i.e. fare/km flown) are largely stable regardless of distance.
“That said, the passengers services charges (PSC) levied by MAHB on passengers travelling through its Malaysian airports are markedly different for domestic (RM8/RM11) and international passengers (RM40/RM80).
“GEs tend to drive domestic passenger traffic which is lower yielding.”
Nonetheless, the research arm maintained its Capital A and MAHB estimates which are premised on Capital A’s FY22E MAA passenger traffic recovering to 50 per cent of 2019A levels and MAHB’s FY22E Malaysian domestic traffic recovering to 60 per cent of 2019A levels.
‘Banking’ on election results
GIVEN that market sentiment may be weak in the run-up to GE15, tactically MIDF Research believed that investors should look for sectors that are more agnostic towards the result of the election and with good fundamentals that are closely tied with the performance of the economy, such as the banking sector.
“We continue to be positive on the banking sector and going forward, we expect banks’ core earning drivers to remain with strong loan growth and leading indicators, an environment still rich with liquidity to support the said loan growth, lower credit costs and OPR hike related benefits to net interest margins,” the research arm said.
“Additionally, the banking sector is often synonymous with high deposit yields, with several names offering yields above four per cent.
“This should offset headwinds: namely asset quality concerns, normalisation of operating expenses, heightened deposit competition and still-weak non-interest income sources.”
MIDF Research’s top picks for the sector are Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd (CIMB).
Mindful over media stocks
YEAR-END elections may be a positive catalyst for media stocks, analysts observe, but also note that previous findings have indicated non-conclusive outcomes.
In RHB Investment Bank’s view, the media sector de-rating has seen valuations compressed to pre-pandemic levels, with earnings and downside risks likely priced in.
As such, the research firm kept its ‘neutral’ sector call as it expects adex momentum to remain sluggish, due to the secondary effects of inflation on discretionary spending and advertisers adopting a more cautious approach on ad budgets.
“A national poll being called by the year-end could be a positive catalyst for media stocks, although our previous findings suggest non-conclusive outcomes.
“Despite the uncertain earnings outlook, Astro Malaysia Holdings Bhd remains our preferred sector pick, as the sharp selldown in recent months offers investors a good opportunity to accumulate a stock that is supported by FY24’s FCF and dividend yields of over 10 per cent and nine per cent.
“We believe the challenging market environment could renew talks of a privatisation by its major shareholders.”
Contract awards related to infrastructure (which usually comprise government contracts) for 9M22 was at RM12.1 billion, or at an annualised basis of RM16.1 billion – way below the full-year value of RM33.8 billion for infrastructure in 2021. — Bernama photo
Construction bears risks as projects hang
FOR the construction sector, analysts opine that de-risking activity could happen ahead of the polls, amidst leadership uncertainty, as the sector is dependent on the country’s policies.
RHB Investment Bank recapped that based on data from the Construction Industry Development Board (CIDB), the total value of projects awarded (domestic and foreign) in the first nine months of 2022 (9M22) stood at RM86.8 billion, which is 11 per cent year on year (y-o-y) lower than RM97.5 billion in 9M21.
It also gathered that the number of projects awarded (domestic and foreign) was 7,942 in 9M22, compared to 10,416 projects in 9M21.
“Upon further scrutiny, the value of government construction projects awarded in 9M22 stood at RM23.1 billion, whereby an annualised value would be circa RM30.8 billion versus the full-year value of government project awards of RM43.1 million in 2021.”
In the same vein, the research firm observed that contract awards related to infrastructure (which usually comprise government contracts) for 9M22 was at RM12.1 billion, or at an annualised basis of RM16.1 billion – way below the full-year value of RM33.8 billion for infrastructure in 2021.
“Such statistics show that the job flows so far in 2022 have been rather sluggish.
“As for the award of Mass Rapid Transit 3 (MRT3) civil work packages slated in the fourth quarter of 2022 (4Q22) – in November, as per Gamuda Bhd’s earlier guidance – we do not discount the possibility of a delay in contract awards following the dissolution of parliament on October 10.
“With a possible delay in the MRT3 contract awards to 1Q23, government construction project awards may be lower in 2022 compared to the previous year.”
All in, RHB Investment Bank remained ‘neutral’ on the construction sector, as hurdles in terms of manpower and elevated material costs could persist if not managed well.
“In the meantime, de-risking activity could happen ahead of the polls, amidst leadership uncertainty, as the construction sector is dependent on the country’s policies – evidenced by the KLCON index’s underperformance prior to 12th, 13th and 14th general elections.
“Therefore, the outcome of the upcoming 15th general election could drive the near-term performance of the sector, post elections.
“For example, should the incumbent government retain its position with a convincing majority – this could serve as an impetus for the sector, in light of the political stability.
“Conversely, a weak majority or a hung parliament may stoke concerns regarding policy continuity.”
As such, RHB Investment Bank recommended that investors accumulate shares of companies with robust earnings visibility and strong fundamentals that can withstand political jitters.
The research firm’s top picks were Kerjaya Prospek Group Bhd (Kerjaya Prospek) and Sunway Construction Group Bhd (Sunway Construction).
“Kerjaya Prospek’s net cash pile of RM215 million as at June 30, 2022, together with its framework agreement with Samsung C&T enables the group to be exposed to and involved in more sophisticated projects.
“In addition, its current orderbook is not exposed to any government-related projects.
“Meanwhile, we favour Sunway Construction as it should continue to benefit from internal jobs from its parent, Sunway Bhd which made up approximately 46 per cent of its total outstanding construction orderbook of RM4.2 billion as of end-June 2022, backed by a war chest of circa RM316 million.”
The outcome of general election will drive near-term performance of the construction sector, post-election, analysts say. — Bernama photo
Piling on the bad news for properties
RHB Investment Bank highlighted that as global interest rates continue to rise and, as such, market liquidity gradually declines, the performance of the high-beta KL Property Index has been negatively hit.
According to the research firm, this trend is in line with the performance of the FBM KLCI (ie signifying the broader equity market).
“The property industry has consistently lacked fresh catalysts for a sustainable recovery over the past few years. Decreasing market liquidity would simply point to a decline in the demand for real estate,” RHB Investment Bank said.
Premised on this, the research firm expects property developers’ earnings growth to be sluggish over the next one to two years.
On GE15, RHB Investment noted that the outcome of general election will drive near-term sector performance post-election.
“A government with a strong majority post-GE15 would be the preferred outcome for investors.
“Therefore, the election results are expected to drive the near-term performance of the sector after polls are held, especially given the sector’s current depressed valuations.
“However, long-term outlook remains dependent on the evolution of the global macroeconomic environment, as the ongoing Russia-Ukraine war, China’s zero-Covid policy and the US Fed’s monetary policy will continue to have strong influence on commodity prices, interest rates as well as currencies.
“In our opinion, a sustainable sector recovery may happen only when interest rate upcycle comes near to an end.”
The government has earmarked RM8 bilion for the next phase of Jendela. — Bernama photo
Telco: Nation’s digiltalisation, connectivity agenda likely to continue
RHB Investment Bank opined that in spite of the dissolution of parliament and the eventual change in the government, policies with respect to the nation’s digiltalisation and connectivity agenda are likely to continue.
The research firm recapped that the government has earmarked RM8 bilion for the next phase of the National Digital Network (Jendela) which will see the targets for fibre premises passed and 4G population coverage raised to nine million and 100 per cent by end-2025 (from 7.5 million and 96.9 per cent by end-2022).
“A RM700 million allocation will go towards improving the digital connectivity in 47 industrial areas and almost 3,700 schools nationwide.
“Like phase 1, the fixed line and infrastructure players stand to gain most, with 80 per cent of the cost to be borne by the industry and the remainder from the universal service provisioning (USP) fund. Together with the reported RM28 billion investment under Phase 1, the overall cost of Jendela works out to some RM36 billion for 2020 to 2025.
“Notwithstanding the dissolution of Parliament and the eventual change in the government, we see policies with respect to the nation’s digiltalisation and connectivity agenda continuing – with Jendela being an inherent part of the MyDigital blueprint and the 12th Malaysia Plan.”
As for the Mandatory Standard on Access Pricing (MSAP) public inquiry (PI), the Malaysian Communications and Multimedia Commission (MCMC) announced on October 18 that the closing date for this PI has now been extended until January 3, 2023, from November 21, 2022 previously.
RHB Investment Bank opined that this was likely in response to the impending polls.
“The extension will allow more time for industry consultations, in our view, more specifically for Telekom Malaysia Bhd (TM) to better justify the case for broadband access prices (for the 2023 to 2025 regulatory period) to reflect the higher cost of access.
“The latter should take into account inflationary pressures and significant fibre investments to improve coverage, connectivity, and quality over the past three years.
“Under the PI issued on October 5, the regulator had proposed a 41-52 per cent reduction in high-speed broadband access (HSBA) prices for Layers 2 and 3 versus current prices (2018-2022).”
While this looks to be negative for TM, and could renew concerns over retail fixed broadband price competition, the research firm noted that final access prices could still be higher than originally proposed.
“In the previous MSAP review in 2017, finalised HSBA prices were two-fold to four-fold higher than the regulatory proposals.”
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