Highlights

• Supporting a sustainable future with a lower fiscal deficit. Budget 2024 supports the 12th Malaysian Plan in securing a more sustainable future with a carefully crafted retargeting mechanism for subsidies which helps to reduce 2024 fiscal deficit to 4.3% from 5% in 2023 and 5.6% in 2022. The 2024 budget allocation of RM393.8mil represents a modest 5.8% increase from RM372.3bil in 2023.

• 7% contraction in development expenditure. While 2024 operating expenses are expected to increase by 9.6% to RM303.8bil from RM277bil in 2023, the development expenditure of RM90bil represents a 7.2% YoY contraction from RM97bil (including a RM2bil contingency provision) in 2023, given the absence of new major projects being announced apart from the 12th Malaysia Plan which had already been revealed. The lower price tag of RM45bil for MRT3 is within expectations with the front-runners for the project being Gamuda, Sunway Construction and IJM Corporation. Gamuda is also the front-runner for the RM10bil Penang LRT project.

• Targeted subsidy removal. As highlighted by several ministers since early this year, the government will gradually retarget subsidies by removing price controls on chicken & egg prices to ensure supply security. Together with RM10bil allocated for Rahmah cash contribution and RM2.4bil cash assistance for poor households, elderly and children, this will be beneficial for Leong Hup International while Power Root could mitigate the increase in excise duty by 10 sen/litre to 50 sen/litre on sugary drinks with reformulations to alternative ingredients. While selected users such as transport companies will continue enjoying diesel subsidies, other temporary users will be excluded. Nevertheless, we are glad that the RON95 petrol subsidy will be maintained, as any reduction could lead to higher general inflation and dampen consumer purchasing power.

• Boost for property, healthcare and tourism sectors with the introduction of a Malaysian visa liberalisation plan and relaxation for conditions on Malaysia My Second Home programme. This includes employment passes for investors in key strategic sectors, visa-on-arrival/multiple entry visa offers to tourists/investors from India and China as well as long-term social visit pass for international students who have graduated. The healthcare sector will also benefit from a 13% YoY increase in allocation to the Ministry of Health. Meanwhile, the imposition of a flat stamp duty of 4% on deed of transfer of ownership for real estate by non-citizens and foreign-owned companies is likely to have a minimal impact on local developers given the majority of local buyers.

• Neutral on EV incentives. For energy transition policies, we expect a largely neutral impact for autos benefiting from EV income tax relief on installation, hire-purchase or subscription fees for EV facility expenses given the limited availability of electric charging facilities and constrained range distance of the vehicles against the backdrop of the country’s subsidised petrol price regime.

• Negative impact from higher service tax, CGT on unlisted shares and e-invoicing. The service tax rate will be raised to 8% from 6%, which excludes food & beverages and telecommunications. However, as other services such as logistics, brokerage, underwriting and karaoke will be included, this could introduce additional brokerage fees charged by stock brokers. This will then see higher transaction costs, particularly for retail investors and traders, potentially dampening market liquidity in the near-medium term unless the government provides additional exemptions.
  The government will also implement capital gains tax (CGT) at 10% for disposal of unlisted shares starting from 1 March 2024. While this could dampen venture capital activities, the impact could be partly mitigated for some investment banking deals as disposals for IPOs and share restructuring within the same group will be considered for exemption. Currently, tax payers can opt for 10% of the net gain on share disposal or 2% of gross sales value.
  Meanwhile, administrative costs for small medium enterprises could rise with e-invoicing, although this will first be implemented for larger companies with annual sales exceeding RM100mil from 1 Aug 2024, with other businesses in phases from 1 July 2025.

• High value goods tax at 5%-10% on jewelry and watches based on threshold prices yet to be announced may not have any significant impact on the M40 or B20 segments. Hence, this is likely to have a subdued impact to consumer sentiments and neutral for companies targeting the affordable segments such as MR DIY and Padini.

• Winners & losers. The beneficiaries of Budget 2024 are the consumer, property, healthcare, logistics and tourism sectors. However, the financial sector could have a mild negative impact from the higher service tax and CGT on unlisted shares. The construction, telecommunication and automobile sectors are generally neutral in impact (See Appendices).

Equities at regional bargain valuations

• Mixed Malaysian equity valuation against the region. The low trading volume led to the FBMKLCI underperforming against the region, being the fourth worst YTD regional performer at -3.5% after Thailand’s -13.1% and Hong Kong’s -9.7% and Philippine’s 4.4% (Exhibit 7).
  The FBMKLCI’s 1-year forward PE of 14.5x translates to 0.4 standard deviation to its 5-year median (SD5YM) of 15.1x (vs. prepandemic 2017-2019 median of 17x). This appears mixed given the region’s below-median valuations such as Hong Kong/Vietnam’s SD5YM of -1.4, Singapore/Philippines’ -1.2 and Indonesia’s -0.6 (Exhibit 18).

• Mild 2024F earnings growth prospects. Following the recent round of earnings revisions, our FBMKLCI 2024F earnings growth of +11.3% appear slightly more aggressive than consensus’ +10.4%. However, this appears mild compared to South Korea’s +55% and Taiwan’s +24%, which are projected to rebound from -26%-34% contractions this year. Except for Singapore’s tepid corporate earnings growth of 2.6% and Hong Kong’s 9.6%, the entire region is expected to grow at a faster 2024F pace with Vietnam at 31%, India 20%, Japan 16%, China/Thailand 15%-16% and Indonesia/Philippines 12%% (Exhibit 19).

• We maintain our base-case end-2023 FBMKLCI target at 1,515, pegged to an unchanged 2024F P/E of 15x – at its 5-year median albeit at 3 standard deviation below pre-pandemic 2017-2019 median of 17x. Nevertheless, we still expect some upward traction towards the end of the year on ample local liquidity, below-median P/E valuation of 14x, highly compelling dividend yields and year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low of 19.9% currently and prospects of an improving ringgit.
  A best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,635, pegged to 2024F P/E of 16.2x at 0.5 standard deviation (SD) above its 5-year median.
  The worst-case scenario from a global recession, new pandemic-driven lockdowns and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,294, pegged to 2024F P/E of 12.8x at 1 standard deviation below its 5-year median (SDB5YM). We do not discount global equity volatility from more US rate hike surprises, bank failures and fresh geopolitical/trade tensions.

• OVERWEIGHT on oil & gas, autos, consumer, power, property and REIT sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Gamuda, Yinson and Pavilion REIT (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, Sunway REIT and Gamuda (Exhibit 5).

Source: AmInvest Research - 16 Oct 2023