2015 Budget: People Economy -- from KENABGA

2015 Budget: People Economy
Muted To Equity Market
By Chan Ken Yew / kychan@kenanga.com.my

2015 Budget. Prime Minister announced the 2015 Budget last Friday (10/10/14). We understand
that this budget is the final budget to complete the 10th Malaysia Plan (10MP) and serves as basis
for planning and preparation of programmes and projects under the forthcoming 11th Malaysia
Plan (11MP) that will be launched in May 2015. In this Budget, seven (7) main strategies were
highlighted. These strategies are (i) strengthening economic growth, (ii) enhancing fiscal
governance, (iii) developing human capital & entrepreneurship, (iv) advancing bumiputera agenda,
(v) upholding role of women, (vi) developing national youth transformation programme and (vii)
prioritising well-being of the Rakyat. The Budget has allocated a total of RM273.9b. Out of which,
RM223.4b is set for operating expenditure, RM48.5b is prepared for development and RM2.0b is
served as contingency fund. In the Budget, corporate and personal income tax cuts were
announced and additional items that exempt from Goods & Services tax (GST) were clarified. It
was announced that a new mechanism to provide petro subsidies to be developed as well.
Within expectations, hence muted to equity market. In a nutshell, we believe that this Budget announcement springs no surprises on the local equity market. This is because most of the “goodies” have no significant impact to corporate earnings.
Besides, the “goodies” for the Rakyat may also be neutralised by the implementation of GST in early-2Q15. Furthermore, both tax cuts had also been announced in the 2014 Budget and the positive impact could have factored into analysts’ forecasts earlier. Thus far, we maintain our FY14E and FY15F net earnings growth rates of 4.9% and 11.3% respectively.
We also do not foresee strong inflow of foreign capital in the near-term, as the prospect of stronger sovereign rating inline with the continued improving fiscal deficit could have largely priced in as well. As for impacts to various sectors (see Appendix for details), we believe the Budget is generally NEUTRAL to most of the sectors.

However, we do see some sectors with positive tone. These sectors are: (i) Building Materials, (ii) Construction, (iii) Gloves, (iv) Plastic Packaging, and (v) Semicon and Telco. Both building materials and construction sectors are believed to be beneficiaries from a number of major infrastructure projects including: (i) 4 new expressways, (ii) upgrade of east coast railway line and (iii) expansions of MRT & LRT light rail services. Gloves, packaging and semicon players are expected to benefit from an automation capital allowance of 200% that will be provided on the 1st RM4m expenditure incurred within the period from 2015 to 2017. Telco, on the other hand, is expected to benefit from the High-Speed Broadband (HSBB) project and the building of 1,000 telecommunication towers as well as the laying of undersea cables.

On the contrary, against market expectations, we did not see much catalyst for the property sector. The announced Rakyat-friendly measures such as: (i) Youth Housing Scheme, (ii) PR1MA housing, and (iiI) People Housing Programme, are likely to have no meaningful impact to developers under our coverage. Recall that the market was expecting the relaxation of DIBS (Developer Interest Bearing Scheme) for 1st home buyers to purchase affordable housing and a review of RPGT (Real Property Gain Tax).
All in all, 2015 Budget is a non-event to the local equity market. We believe the direction of local equity hinges on external uncertainties and volatilities going forward. Thus far, FBMKLCI declined by 2.0% since end-September 2014 inline with the decline of 2.9% in Dow Jones Industrial Average.
Having said that, our view and year-end target of 1,910 remains unchanged. We believe the domestic market will still be supported by the strong domestic liquidity position and the favourable seasonal pattern. Besides, as FBMKLCI is traded at 7% discount to its consensus target price of 1,945, the downside could be limited. Based on the track records between FBMKLCI and its consensus target, we believe any dips below 1,830 should serve as “Buying On Weakness” (B.O.W.) opportunities.

Apart from YTD underperformers / laggards, we still like BARAKAH (OP, TP: RM1.74), COASTAL (OP, TP: RM5.94), GAMUDA (OP, TP: RM5.52), KSL (TB, TP: RM6.63), MUHIBAH (OP, TP: RM3.55), SIME, (OP, TP: RM10.10), SUPERMX (OP, TP: RM3.23) and VS (TB, TP: RM3.16). Our other 2 Top Picks - MBSB (OP, TP: RM2.65) and RHBCAP (OP, TP: RM10.00) – have performed well after the recently announced CIMB-MBSB-RHBCAP merger structure. As such, we are replacing these 2 Top Picks with MPI (OP, TP: RM6.72) and PMETAL (OP, TP: RM8.87).