Highlights

• Budget 2023 reinforces the country’s economic recovery trajectory from the 2020-2021 Covid lockdowns and global commodity uncertainties with a stronger emphasis on sustainability for net-zero climate change goals, job creation, community support and wider participation from women workforce. The 2023 budget allocation of RM372.3bil highlights a solid 12% growth from RM332bil in 2022, which registered a 3% YoY increment amid escalating global inflation and supply disruptions.

• Strong 26% development expenditure growth. The 2023 development expenditure (DE) of RM95bil represents a compelling 26% YoY growth (vs +18% this year), underpinned by the Mass Rapid Transit 3, transport-related projects such as the Pan-Borneo highway, Gemas-Johor Bahru twin railway, RTS link and Central Spine road together with flood mitigation projects.

• No new tax is good news. We are relieved that corporates were not compelled to support the 2023 expansionary budget with a continuation of the 2022 Prosperity Tax (additional 9% effective tax rate for corporate taxable income above RM100mil), wider reach of the existing Sales & Service Tax or re-introduction of the Goods & Services Tax (GST). The earlier GST of 6% introduced on 1 April 2015 and subsequently replaced with the Sales & Service Tax on 31 July 2018 following the 14th general election (GE) was generally not welcomed by the public and not expected to be re-implemented against the backdrop the upcoming GE15. Also, recall that in October 2021, the government proposed for a stamp duty rate hike beginning this year to 0.15% from 0.1% and abolished the RM200 duty cap, which was later raised to RM1,000. Hence, we view no additional tax on corporates as a positive catalyst for the local equities market given the improved forward earnings visibility.

• Stimulus for BKM 2023 and targeted tax reduction. RM7.8bil allocated for Bantuan Keluarga Malaysia (BKM) 2023 and is expected to benefit 8.7mil recipients. This is lower than BKM 2022, which budgeted RM8.2bil to benefit 9.6mil recipients. Together with a measured tax reduction on selected segments, this provides a short-term economic uplift given the 2% reduction in income tax on micro SME operators as well as personal income of M40 population segment with earnings between RM50k-RM100k.

• GLC and GLC to invest RM50bil in 2023 into the domestic market, venture capital and ESG-targeted funds. Commitment by government-linked companies (GLC) and government-linked investment companies (GLIC) to invest RM45bil domestically in 2023 could involve property projects as well as fixed income and equities.

• Catalyst for a re-rating. All in, we are sanguine on the expansionary development budget and the non-extension of the Prosperity Tax, which remains as a one-off charge in 2022, given that every FBMKLCI constituent stocks registered 2022 pretax profit of well over RM100mil. We estimate that a continuation of the Prosperity Tax would have led to the FBMKLCI companies bearing a 2023 total tax charge of RM8.6bil, which translates to a market loss of RM118bil based on a PE of 14x. As a comparison, MayBank is Bursa Malaysia’s largest market cap with RM104bil currently.

• Winners & losers. The direct winners from 2023 Budget are property developers, who benefit from the increase in stamp duty discount to 75% from 50% for the purchase of residential house valued between RM500K and RM1mil. Key beneficiaries are mainly developers such as S P Setia, UEM Sunrise, Sunway and Sime Darby Property, whereby the mix of their property developments are skewed towards the pricing of above RM500K. Indirect beneficiaries would be consumer stocks such as Mr DIY and Guan Chong which benefit from the cash handouts to BKM recipients together with M40 personal income tax cuts.
  Although the Budget 2023 DE, which is the largest ever, looks positive for the construction sector, the Public Private Partnership (PPP) model means that main contractors would have to take on higher risks to participate in the funding of the projects. A total of RM66.7bil has been earmarked for infrastructure projects, all of which were already announced previously, the most prominent being the MRT3. Hence, we remain Neutral on the construction sector. Likewise, while the extensions for EV vehicle incentives are a step in the right direction for ESG prerogatives, the near-term impact remains neutral for the auto sector which has minimal sales exposure to this segment.
  The losers are plantation, technology, EMS, manufacturers, glove and healthcare sectors as a multi-tiered levy system for migrant workers will increase their production costs.

Source: AmInvest Research - 10 Oct 2022