KUALA LUMPUR (Feb 25): While the Ukraine-Russia conflict weighs on the market, Hong Leong Investment Bank (HLIB) Research said there are trading opportunities in stocks involved in the oil and gas (O&G) industry that benefit from higher oil prices, as well as plantations as a disruption in sunflower oil supply could be a boon for palm oil.
In a note Friday (Feb 25), the research firm wrote that global markets have been dragged down by the conflict between the two former Soviet nations, as the risk of higher energy prices and shortages could exacerbate the ongoing supply chain disruption, further fuelling cost-driving inflation and making a case for even faster monetary tightening.
“The local bourse, too, has not been spared with its bellwether index down 1.9% from its YTD [year-to-date] high of 1,605 just a week ago. Still, there are pockets of trading opportunities from this.
“Higher oil prices would benefit those with upstream exposure — Hibiscus Petroleum Bhd (non-rated), Dagang NeXchange Bhd (our conviction ‘buy’, TP: RM1.64) via its 90% stake in Ping Petroleum and Sapura Energy Bhd (‘hold’, TP: RM0.05),” said the research firm.
Another likely winner is plantation, where HLIB has an "overweight" call for the sector.
“The plantation sector is another likely winner as sunflower oil supply disruption (76% comes from the Black Sea region where Ukraine is located) would cause buyers to seek alternative [vegetable] oils, palm oil included.
“While higher global energy prices may eventually reach Tenaga Nasional Bhd (‘buy’, TP: RM13.60), we find solace in the IBR [incentive-based regulation] and ICPT [Imbalance-cost pass through] mechanisms — which were honoured during last month’s tariff review,” it added.
Both Ukraine and Russia are small trading partners of Malaysia, together accounting for only 0.4% to 0.5% of total trade over the past five years, HLIB said.
Naturally, the research firm expects minimal direct impact on Malaysia from the ongoing conflict, but there will be an indirect impact via higher oil prices.
“We estimate fiscal revenue to gain RM300 million for every US$1 per barrel increase in Brent oil price vs MOF’s [Ministry of Finance] benchmark assumption of US$66 per barrel for 2022.
"However, with the retail price of petrol capped (RON95: RM2.05 per litre, diesel: RM2.15 per litre), we calculate that the government will have to incur additional fuel subsidy cost of RM653 million for every US$1 per barrel increase.
“Assuming Brent oil price averages US$100 per barrel for the year (YTD: US$89 per barrel) and exchange rate of USD-MYR 4.19, this could lead to a net deterioration in Malaysia’s fiscal balance by RM12 billion or 0.7% of GDP [gross domestic product] — MOF’s targeted fiscal deficit is 6% for 2022 (2021p: 6.4%),” HLIB explained.