KUALA LUMPUR: Affin Hwang Capital Research remains positive on Malaysia and maintains its end year target for the FBM KLCI at 1,793 points.
“Although market risk has increased, our sector and stock strategy is based on fundamentally-strong recommendations that are adept at navigating the current environment and well positioned to capitalize on the opportunities as, and when, conditions improve.
“The KLCI is currently trading at 16.9x 2016 PE, which is below its 17.8x historical average,” Affin said in a strategy report.
The research house noted that the crude oil price had fallen sharply since December 2015 raising fears of dragging the ringgit and the KLCI down with it.
But evidence suggests that a decoupling has taken place for Brent-Ringgit and Brent-KLCI.
It said the Brent price had a huge influence on three key areas and its analysis showed a manageable impact even at extreme crude-oil prices.
“We believe the KLCI will see limited downside risk from lower crude, but upside potential far outstrips it if oil were to rebound. However, the US Energy Information Administration (EIA) is not expecting major price upswings due to record-high inventories. Global growth is still expected to be better in 2016 than 2015, though risks have increased given recent volatility,” Affin said.
Despite the sharp 16.4% fall in Brent price to US$37.28 per barrel in December 2015, the Ringgit closed the month flat at RM4.29 per US dollar.
“Stepping into the New Year, the crude oil price has fallen more sharply, by 24% to US$28.55 per barrel currently, yet the ringgit has weakened by just 2.3% to RM4.39.
“In fact, the fall in ringgit was likely due to Renminbi weakness rather than Brent. Similarly, the KLCI strengthened by 1.2% in December, but the 4.13% selldown so far in January to 1,622.6 is likely due to CSI300,” the research house pointed out.
Affin said the implication of lower oil prices was manageable. It estimated that Malaysia’s petroleum revenue is US$60 per BOE (barrel of oil equivalent), production cost is US$35/boe and pre-tax profit is US$14 in 2015.
“Similar calculation yields revenue of US$32 per boe, production cost of US$20 and pre-tax profit of US$13 in 2016, based on the Federal government fiscal revenue for Budget 2016. Our own input in the calculation is a Ringgit-USD cross rate of RM4.30 and production volume of 456 million boe, which is assumed to be the same as in 2015.
Recapping, the Federal government fiscal deficit is estimated at 3.2% in 2015 and is targeted at 3.1% in 2016. The average crude oil price assumptions are US$55 per barrel and US$48 a barrel, respectively. On a conservative basis, our analysis indicates a fiscal deficit of 4.2% of GDP at US$30 per barrel Brent price and 3.6% at US$40 per barrel,” Affin said.
“At an extreme view where Brent falls to US$5 per barrel, the impact on the Federal government fiscal position deteriorates marginally only to 4.4% deficit,” it said, adding that this analysis was based on Federal government Budget 2016 figures.
Affin explained that it was conservative because it had assumed LNG prices to fall in tandem with Brent.
“We are not privy to the terms but we understand that LNG contracts typically have a floor price limit set in the offtake agreement. Separately, government officials have been quoted in saying that every US$1 per barrel drop in Brent oil would represent a RM300mil annual loss in Federal revenue.
“In this instance, we estimate that the fiscal deficit would widen to 3.6% in 2016 at US$30 per barrel Brent. These are very manageable given that the country’s worst fiscal deficit was 6.7% in 2009,” Affin said.
Although Affin said the lower oil prices was manageable, it said the main risk stemming from Brent is if the rating agencies downgrade Malaysia’s sovereign rating, thus putting pressure on the Ringgit and, in turn, damaging consumer sentiment.
“The government is announcing a revised budget for 2016 this month and our economist expects it to hit the 3.1% fiscal deficit target on US$30 oil by adept cuts mostly in operating and some trimming of development expenditures.
“Beyond that, the biggest risk on the overall market is an external-led global slowdown/recession. IMF has just trimmed its global growth forecast to 3.4% in 2016 from 3.6% previously. However, this is still higher than the 3.1% in 2015,” Affin said.
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