Investment Highlights

• GST reintroduction. Prime Minister Datuk Seri Ismail Sabri Yaakob said that Malaysia is deliberating the reintroduction of a goods and services tax (GST) to expand its revenue base and carry the weight of public subsidies. The GST was first implemented on 1 April 2015 at 6%, replacing the sales and service tax (SST). It was then abolished and the SST was brought back in September 2018 when the Pakatan Harapan government came to power. Ismail Sabri said that while he was aware of the negative perception surrounding the GST, the government had limited options for replenishing the country’s coffers.
  In March this year, the Finance Ministry was evaluating the reintroduction of the GST as part of major fiscal reforms to strengthen the country’s revenue capacity. Bank Negara recently supported the idea of the GST being reinstituted as that would relieve the heavy financial burden faced by the government. Ismail Sabri said that the government would aim for a GST rate that was not so high that would burden the people, yet not so low that it “defeats the purpose of expanding tax revenue”.

• Zero-to-negligible impact for most of FBMKLCI constituents. We have undertaken channel checks and an analysis into companies under our coverage on the potential impact from the reintroduction of the GST at 6%, under a maximum rate scenario. We view that most of the sectors – banks, oil & gas, plantation, telcos, power, healthcare, gloves, manufacturing, gaming and technology – will have zero-to-negligible impact from the GST (Exhibit 1). These sectors account for 93.5% of the FBMKLCI index weighting (Exhibit 12).

• Manageable 1.2%-point impact to 2023 FBMKLCI growth. The remaining sectors, which make up 6.5% of the FBMKLCI index weighting, comprise automobiles, food, consumer products and retail. These FBMKLCI constituents are Sime Darby, Nestle and MR D.I.Y. Car prices are expected to increase by 1–3% following the switch back to GST, the opposite effect to the 2018 SST switch while essential food manufacturers such as Nestle could partly benefit from cash assistance to the B40 and M40 groups. Under a worst-case scenario assuming that the GST reintroduction reduces these 3 companies’ FY2023F core earnings by 10%, we estimate a manageable 1.2%-point impact to our FBMKLCI 2023 EPS growth forecast of 8.3% to 7.1%.

• Caution on property development, REIT and media sectors, which are not represented in the FBMKLCI, yet could be impacted by the GST. The property sector could be vulnerable to softer demand from higher product prices amid heightened affordability concerns. REITS could experience slower footfall and tenant sales growth on reduced consumer spending while the media sector could suffer from lower subscribers and adex spending.
  Within our coverage, non-KLCI stocks which could be affected include Berjaya Food, Cocoaland, Mynews, Padini, Power Root, Bermaz Auto, DRB-Hicom, MBM Resources, Tan Chong Motor, UMW Holdings, Astro, Media Prima, Lagenda, S P Setia, Mah Sing, Sime Darby Properties, UEM Sunrise, Sunway, IOI Properties, IGB REIT, Pavilion REIT and Sunway REIT (Exhibit 1).

• Net foreign buying still likely to continue. 2022 YTD, foreigner equity investors have remained in net buying positions with a total RM7.4bil (Exhibit 4), raising foreign shareholding to 20.4% as at May 2022 from 20.1% in Feb this year. Supported by robust oil prices and 2022 GDP growth of 5.6%, our in-house base-case view the ringgit strengthening against the USD from RM4.38 currently to RM4.25 in 4Q2022 with up to 2 rate hikes in 2H2022, gradually normalising to RM4.12 in 2023. Under this relatively contained currency risk outlook, we still expect foreign investors to continue gravitating towards Malaysian equities.

• Maintain base-case end-2022 FBMKLCI target at 1,745, pegged to its 5-year median as local investors are likely to switch into buying positions towards the end of the year amid clearer visibility to 2023F EPS growth prospects. Near term, we expect the index to be range-bound between 1,500 and 1,600 as the recent reopening of international borders may be mitigated by stagflationary worries, earnings volatility amid commodity price swings, further supply chain shocks from Russia being shunned by the global economy, GST reintroduction and political noises running up to the 15th general election (GE15).
  Our worst-case outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 1 SD below its 5-year median, driven by substantive earnings disappointments, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows. We maintain a blue-sky FBMKLCI index scenario at 1,820 pegged to 0.5x SD above its 5-year median based on a stronger 2022 GDP growth at 6%.

• Maintain OVERWEIGHT on the automobile, banking, media, oil & gas, ports, power and technology sectors with top BUYs being Maybank, Tenaga Nasional, CIMB Group, RHB Bank, MR D.I.Y., Telekom Malaysia, Inari Amertron, Malaysia Pacific Industries, UMW Holdings and Dialog Group. For dividend stocks, our top 5 picks with yields of over 6% are Malakoff, Astro, Globetronics, Lagenda Properties and YTL REIT.

Source: AmInvest Research - 3 Jun 2022