PETALING JAYA: The reopening of Malaysia’s borders following the Covid-19 pandemic lockdowns has given a boost to the Malaysian economy especially the consumer, real estate investment trust (REIT), and construction sectors, said MIDF Research.
The research house issued its report card today on the impact of the reopening, focusing on six key sectors and outlining its top picks for the various sectors.
Despite an overall positive outlook for Malaysia’s economy, MIDF has noted some sectors will cope better than others. The “positive” sectors are consumer, REIT, and construction while the “neutral” sectors are aviation, property and plantation.
It said the biggest boost from the reopening of the borders in April 2022 was from the export of services, which grew 81.4% year-on-year (y-o-y) in Q4 CY2022 on the back of the recovering tourism sector.
“Moving forward, we foresee real export of services to expand by +6.6% in 2023 (2022: +57.9%) and +12.5% in 2024.
“China’s sooner-than-expected reopening provide a silver lining to global economy. The reopening would boost Malaysia’s services exports as well as tourism activity,” it added.
MIDF has also predicted gross domestic product (GDP) to expand by 4.2%, a softer prediction than 2022 (8.7%) as the global economy is expected to slow down rather than fall into recession in 2023.
This is on the back of higher interest rates, banking turmoil, and elevated inflationary pressure as domestic demand in the US and European Union (EU) will likely dampen this year, affecting exports and tourism.
The labour market has also recovered, led by returning migrant workers. MIDF said Malaysia has lost 300,000 migrant workers coming out of the pandemic, with non-citizen employment 10% lower than pre-pandemic levels.
Here are excerpts of MIDF’s sectoral performance assessment:
REIT (Positive)
Higher tourist arrivals support earnings growth of retail REITs as higher shopper footfall at malls which are tourist hotspots. Note that tourists typically made up about 20%-30% of shopper footfall at malls in Kuala Lumpur city centre pre-pandemic.
Higher footfall will increase tenant sales which will underpin the positive rental reversion outlook at shopping malls and bodes well for earnings growth of retail REITs namely Pavilion REIT, IGB REIT, Sunway REIT and KLCCP Stapled Group.
Furthermore, REITs with exposure to the hotel industry namely KLCCP Stapled Group and Sunway REIT should benefit from the turnaround of the hotel industry. Top picks are IGB REIT (Buy, Target price (TP): RM1.86) and Sunway REIT (Buy, TP: RM1.73), which have strong presence in the hotels and malls.
Consumer (Positive)
Higher traveller spending will be good news for local food manufacturers who provide packaged foods and snacks that are ready-to-eat and can be carried on buses, trains, or planes. A stable labour market, high tourist movement and better margins for food and beverage (F&B) producers supported by the lower commodity prices and a stronger ringgit augurs well for the sector.
Overall, we believe that well-known F&B producers with high production capacity such as Nestle Malaysia (Neutral, TP: RM139.50), F&N (Buy, TP: RM33.50), and Spritzer (Buy, TP: RM2.80) could benefit from supplying products to tourist-oriented restaurants and hotels.
Other picks included, Leong Hup International (Buy, TP: 90 sen), QL Resources (Buy, TP: RM6.80), Malaysia’s biggest poultry producers, and AEON (Buy, TP: RM1.90).
Construction (Positive)
The return of foreign labour will allow operations to catch up on work progress quenching the labour drought that the sector has been experiencing.
Overall in 2022, the construction sector rebounded 8.8% with a value of work done of RM121.9 billion not too far off the pre-pandemic number of RM146.4 billion in 2019.
We bank on the upcoming MRT3 to be the mega project that will give the construction sector a boost this year. Industry players may be affected by the rise in steel bar prices alongside the rise in prices of iron ore but we expect it to only be a short-term problem.
Top picks are Gamuda (Buy, TP: RM5.04), Sunway Construction (Buy, TP: RM2.00) and Mah Sing Group (Buy, TP: RM2.00)
Aviation (Neutral)
Domestic passenger traffic has recovered to 80% of 2019 levels, whereas international passenger traffic is still lagging behind at 62% of its pandemic peak due to delayed reopening of Northeast Asia markets.
We believe the recovery of this sector is still in its early stages, as airlines are gradually increasing their flight offerings. As of February 2023, passenger movements from China were 13% of 2019 levels. We expect passenger traffic to recover to 85% (domestic: 90%, international: 80%) this year on the back of narrowing jet fuel crack spread, a stronger ringgit against the US dollar and reasonable airline pricing.
The top pick is Capital A (Buy, TP: 91 sen) which expects full utilisation of its fleet in Q3 FY2023 and may turn profitable in 2024, with all eyes on its PN17 regularisation plan in Q2 FY2023.
Property (Neutral)
The higher tourist arrivals in 2023 will be slightly positive for the property sector as foreign buyers typically made up around 10% to 15% of buyers pre-pandemic.
Hence, the return of tourists could support buying interest on property slightly, particularly properties in Johor and KL which may see buying interest from tourists from Singapore and China. Interest will depend on the attractiveness of incentives for foreigners to purchase properties in Malaysia such as Malaysia My Second Home (MM2H).
Foreigners could also improve residential overhang particularly in states with higher overhang units namely Johor, Selangor and Penang.
Top picks are Mah Sing Group (Buy, TP: 75 sen) and Glomac Bhd (Buy, TP: 43 sen) due to their high exposure to mid-market and affordable homes segments.
Plantation (Neutral)
The return of foreign labour will be crucial. The recovery in the plantation sector continues with the recent announcement that the labour shortage in oil palm plantations is about 80% sorted and approvals have been given to fully resolve the situation.
We maintain that for Q2 CY2023, performance will continue to improve since palm trees pollination cycle is now at a tail end and there will be fewer wet days.
As a result, a 23% increase quarter-on-quarter to 4.82 million tonnes is imminent based on our assumption. We maintain a “neutral” call on the sector with an average CPO target price of RM3,500 for 2023.
Source: https://www.freemalaysiatoday.com/category/highlight/2023/04/06/malaysias-border-reopening-boosts-consumer-reit-and-construction-sectors/