Infra pump priming and consumer spending led 2018E GDP growth of 5.2%
Prime Minister Najib set an upbeat tone in 2018 Budget by forecasting 5.2% to 5.8% GDP growth. The pillars of 2018 GDP growth YoY are construction (+7.6%), services (+5.8%) and manufacturing (+5.3%). The winners of this budget are contractors (IJM & GAM), airport operator (MAHB), tourism (GENM) and consumer-centric proxies, such as Astro, telco and convenient stores (Bison). Outlook for tobacco players, such as ROTH, is gloomy as the government merely estimated excise duty collection growth of 4.5%.
Infra pump priming continues and Malaysia aims to create 3.3mn new jobs
The re-affirmation of key projects (MRT 3, High-Speed Rail, East Coast Railway, LRT) worth MYR175bn coupled with MYR6.5bn for rural development and plans to upgrade and expand airports, plus many to-be confirmed projects should keep Malaysia contractors busy until 2026. Besides the major players, we expect smaller contractors, such as Sunway Con, George Kent, AZRB, Muhibbah and WCT, to benefit too. The sector will support job creation.
Personal income tax cut to spur consumer discretionary spending
The 2ppt reduction in taxable income ranges from MYR20-70k should lift disposable income by MYR300-1000 against household income of MYR43k. Further, the infra projects’ estimated multiplier effect on CY18-20E on M2 by a magnitude of MYR2.5-5bn per year (+4-6% YoY) might have a positive impact on consumer discretionary proxies. The influx of foreign labour should benefit telco players in the prepaid market and convenient stores such as Bison.
Malaysia Budget 2018 Allocation:
Visit Malaysia 2020, to host APEC, WCIT and CHOGM
Budget forecasts a modest 28mn tourist arrivals (+5% vs. 2016) in 2018. But in 2020 Malaysia will host many world events, such as World Congress of IT and Commonwealth Heads of Government Meeting. The inbound and domestic tourism is expected to be buoyant and benefit Malaysia Airport (MAHB). The gaming tax collection is projected to rise by MYR340mn. Assuming no change to the gaming tax, this implies a 11% YoY growth or MYR2bn gross gaming revenue growth – a good read-through on Genting Malaysia (GENM).
Top picks: GENM, IJM, KLK and MAHB; remove ROTH
While illicit cigarette clamp-down has been successful (down 4ppt to 56%), the irrational price war initiated by PMI and JTI Malaysia should erode margins, leading us to remove ROTH from our top picks. The recent sell-down of GENM, in our view, has fully priced in the risk of Mashpee write-off, gaming tax hike and bad 3Q17 results. We remain highly convinced about its growth prospects. KL Kepong’s (KLK) valuable 6600 acre land bank (40km outside of KL City) should benefit from the growing economic development in the capital. Note the entire land bank is worth its current market cap. We also like MAHB for its
exposure to inbound and domestic traffic growth prospects. Moreover, it offers an option to Malaysia’s e-commerce logistics play via Alibaba’s investment.
Last, we add IJM into our top picks. IJM represents a strong proxy to China-led growth, using increased investment from China as a part of its strategic One Belt, One Road initiative and being one of the first beneficiaries of China’s ambitions in Malaysia via the Kuantan Port. The port now stands to be China’s gateway for raw and finished materials from Malaysia.
Valuation and risks
Genting Malaysia
Our target price for Genting Malaysia is based on sum-of-the-parts (SOTP) valuation comprising 20x 2017 P/E for domestic, UK and US gaming operations. While the pegged target is higher than the historical trend, we believe that it is justifiable given the growth is sustainable for next three years. We have pegged 1x historical PB to investment properties. Downside risks include the possibility of further controversial M&A activity, intensifying regional competition and regulatory tightening in operating and potential markets and lower-than-expected return for new investments in the US. Given the lack of clarity in operational data, profit forecast accuracy is thus at risk.
IJM Corporation
We value IJM based on SOTP. We value the construction segment based on a 16x FY19E P/E, in line with the industry average multiple, but also taking into account the growing order book. Meanwhile, we value the industry segment based on a 15x P/E, given the strengthening demand for building materials due to the increased infrastructure investment. We value the property development business using a DCF of its land bank, using a WACC of 6.8%, a 15% development margin and the infrastructure space using a WACC of 6.8%. IJM plantation and Scomi are valued based on market value. A 10% Holdco discount is assumed to arrive at our one-year forward TP. Key risks for IJM include: 1) Execution risk on its construction order book. We assume an average annual replenishment of c. S$3bn. An inability to secure or replenish its order book would be a downside risk. 2) A downturn in the property sector would have a significant impact on valuations, which accounts for 22% of our RNAV estimates. 3) A slower-than-expected ramp-up and expansion of Kuantan port; we forecast the port to reach capacity by 2020, and for the second phase to be completed by 2024. Delays in completion or ramp-up would affect valuations.
KL Kepong
Our target price is based on a sum-of-the-parts valuation, as its earnings are derived from palm oil-based profit and the property development segment. On the earnings front, we apply a 17E 15x P/E (mean valuation). On the property front, we apply a 65% discount to RNAV given the long gestation on unlocking value from the large land bank. Key industry downside risks: a major downturn in CPO or soybean prices; Indonesia's government halts the biodiesel policy; environmental issues that might lead to a revocation of land bank; and a ban of CPO usage in certain countries. Key company downside risks: earnings-dilutive acquisitions; worse-than-expected production; and labour shortages.
Malaysia Airports Holding
We use a two-stage DCF methodology to value MAHB. The first stage is for the initial 10 years based on our financial forecast, and the second stage is from the 11th year to end-of-concession-life at a FCF growth rate of 2% (below IATA long-term growth forecast of 3.5%). Our WACC is 9.1%, with 4.6% rfr, 5.1% CoD, 23% tax rate, 6.5% erp, 1.2x beta, and 65% target d/e ratio. At our TP, FY17E EV/EBITDA would be 12x, lower than 13x Asian average. Risks: 1) PSC revenue based on the 2009 OA does not materialize; and 2) translation losses if the MYR appreciates and depreciates against the EUR and TRY, respectively.
source: Deutsche Bank Markets Research – 27/10/2017
