Market Strategy - Cut in subsidies

The government announced that it would cut subsidies for sugar, petrol, diesel and liquefied petroleum gas (LPG). This would result in higher prices: sugar (+25 sen/kg or 15%), LPG (+10 sen/kg or 5.7%), RON95 (+5 sen/litre or 2.8%), RON97 (+5 sen/litre or 2.4%), diesel (+5 sen/litre or 2.9%). According to The Star, the subsidy cuts would amount to RM750m savings for the government this year. This works out to 0.5% of the estimated federal government operating expenditure (or 3.6% of initial estimates of subsidies for 2010).

Although small at this time relative to the total government expenditure at this point, this could signal a gradual reduction in subsidies. It could indicate that a tariff hike for Tenaga (Buy; RM10.80 TP) could be forthcoming. The subsidy cuts would also allow funds to be channelled to projects that help improve public transportation such as the MRT. The price increases could result in a lift in inflation and dent consumer sentiment but the extent should not be significant at this point. We expect some minor disruption in traffic volume growth for PLUS in 2H with the marginal increase in fuel and diesel prices. PLUS has already chalked up an impressive YTD
traffic volume growth to May 2010 of 9.8% y-o-y for its core highways of North-South Expressway; New Klang Valley Expressway; Federal Highway Route 2 and Seremban- Port Dickson Highway. Management is guiding for traffic volume growth of 3-4% for 2010 while our forecast is more conservative at 2%.

We are already expected a slower 2H on the back of this fuel price hike and the higher base effect in 2009. Reiterate Buy with an unchanged target price of RM4.00. For Gamuda (Buy, TP RM4.35), we see the gradual cut in subsidies as a potential signal that the government is serious
in implementing the RM36bn MRT project. Recall, that the MMC-Gamuda JV has said it will commit RM3bn in funding together with a RM1.8bn performance bond to see initial works of this MRT take off. But balance of the funding has to be from the government which will likely be from the eventual cut of subsidies.

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)