Highlights

• Retabled Budget 2023 aims to ease the people’s financial burdens amid global headwinds. With an emphasis on providing more cash to the lower income segment, educational allowances, EV incentive continuation and promotion of a more investment-friendly ecosystem, the unity government will cut individual income tax rates by 2%-point on annual income between RM35k-RM100k while raising by 0.5%-2% for those in the RM100k-1 threshold. Anticipating slower global economic growth, the 2023 budget expenditure has been raised to RM388bil, up 4% from the earlier budget’s RM372.3bil and a solid 20.5% growth from RM332bil in 2022.

• Stronger 35% development expenditure growth. The 2023 development expenditure (DE) has been raised by RM2bil or 2% to RM97bil, which represents a compelling 35% YoY growth, 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 re-tendered flood mitigation projects. Even though development expenditure would be significantly higher YoY, we caution that these are usually for basic infrastructure projects, which will benefit smaller contractors, most of whom are unlisted. Also, future government jobs are also likely to be awarded via open tender, which could intensify margin pressures.

• No new tax remains good news. As in the previous Budget tabled by then-Finance Minister, Tengku Zafrul, on 7 October last year, we remain relieved that corporates were not compelled to support the 2023 expansionary budget with a continuation of the 2022 Prosperity Tax, which imposed an additional 9% effective tax rate for corporate taxable income above RM100mil. While there is no general expansion of the scope of the existing Sales & Service Tax nor re-introduction of the Goods & Services Tax (GST), the government plans to introduce a luxury goods tax on watches and fashion products while proposing an import duty and sales tax exemption on nicotine gum and patch. This will not adversely impact the B20 and M40 segments.
  Recall that 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 reimplemented given the upcoming state elections. Also, recall that in October 2021, the government proposed for a securities 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 burden on corporates as a positive catalyst for the local equities market given the improved forward earnings visibility.
• Stimulus from Rahmah Cash Handout and M40 personal tax reduction. The Rahmah Cash Handout (RCH), rebranded from the earlier budget’s RM7.8bil allocated for Bantuan Keluarga Malaysia (BKM) 2023, is still expected to benefit 8.7mil recipients with cash of up to RM3,100. While lower than BKM 2022, which budgeted RM8.2bil to benefit 9.6mil recipients, the individual income tax cut of 2%-point to 15% for annual incomes below RM100k will add another RM2.3k, providing a short-term consumption uplift to the country. The tax cut will generally benefit the M40, classified as monthly income between RM4,851 to RM10,970.
• All-in, largely positive. The direct winners from 2023 Budget are consumer stocks such as Mr DIY and Guan Chong which benefit from the cash handouts to RCH recipients together with M40 personal income tax cuts. While the extensions for EV 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 (Exhibit 20).
  In the earlier budget announcement, a multi-tiered levy system was proposed for migrant workers. However, scant details are available on this levy structure currently, which potentially raise labour costs for plantation, technology, EMS, manufacturers, glove and healthcare sectors that have a high proportion of migrant workers. All in, we are largely positive on the revised Budget largely due to the absence of new corporate tax measures.

• Re-rating catalysts still intact. 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 RM105bil currently.

Equities at Regional Bargain Valuations

• Reopening of China’s economy. China’s relaxation of Covid 19 movement restrictions engender improving prospects for regional economic growth against the backdrop of pent-up consumer spending in a country with high savings rates. This will relieve supply chain disruptions that have disrupted global trade over the past year, potentially mitigating recessionary prospects in gasconstrained Europe. All in, we expect this to positively impact most sectors involved in technology, EMS, transportation, plantation, oil & gas, construction, ports, REITS, consumer, local pharmaceuticals and selected property companies with China exposure.

• Net beneficiary from firmer MYR outlook. The MYR has depreciated by 4% to RM4.44/US$ from RM4.24/US$ on 30 Jan 2023, although still much better than RM4.75/US$ on 4 Nov following the formation of a unity government. Our economist still projects our currency to stabilise at the current levels of RM4.20-RM4.30/US$ by end-2023. Overall, this will be a net positive to Malaysian equities, with beneficiaries being automakers (UMW and Tan Chong), consumer stocks (Leong Hup International and Spritzer) and transport companies (Capital A which will pay lower fuel and interest costs). However, the revenue impact will be negative for glove makers (Top Glove, Hartalega and Kossan) and exporters such as Ancom Nylex, as well as for shipping and oil & gas companies (MISC, Hibiscus Petroleum, Yinson and Bumi Armada).

• Expect net foreign equity outflow to reverse in 2H2023. We acknowledge the US Fed rate hike cycle, while tapering at this juncture, will continue to spur volatility in the global markets over the next few months. However, underpinned by Malaysia’s firm currency outlook, we expect a return of foreign equity buyers in 2H2023 amid attractive Malaysian equity valuations and our inhouse 2023 GDP growth projection of a relatively robust domestic consumption-driven 4.5% vs consensus’ 2.4% for global average and pallid 0.7% for US.

• We maintain base-case end-2023 FBMKLCI target of 1,630, pegged to 2024 PE of 14.4x at 1 standard deviation below its 5- year median of 16.6x (SDB5YM), which is supported by Malaysia’s relatively stronger economic outlook and our economist’ stabilising MYR expectation at RM4.20-RM4.30 by December this year. Although Malaysia’s 2023 GDP growth is expected to taper to 4.5% (vs. consensus: 4.0%) from 8.5%-9.00% in 2022, this remains better than recessionary prospects in Europe amid possibilities for a reset in US interest rate hike trajectory in 2H2023.
  Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin a 2023 FBMKLCI target of 1,740 at 0.5 SBD5YM.
  The worst-case scenario from a full-blown global recession, hawkish US rate sentiments in 4Q2023, new pandemics and worsening geopolitical conflicts translates to 1,380, pegged at 2 SDB5YM. We do not discount heightened global equity volatility from more US rate hike surprises, US-China trade tensions and additional global sanctions on Russia.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT, healthcare and media with top picks being RHB Bank, CIMB, Bank Islam, Tenaga Nasional, Yinson, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT and DuoPharma BioTech (Exhibit 6). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 4). Our ESG champions are MayBank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Yinson Holdings, Sunway REIT and Astro (Exhibit 5).

Source: AmInvest Research - 27 Feb 2023