- In the past month, the FBM KLCI has rebounded by some 3% (to 1,817 points currently) on the back of the delay in QE tapering. While risk appetite has improved, earnings have not. Without a turnaround in the earnings revision cycle from an acceleration in corporate newsflow momentum, we do not believe that the liquidity-driven rebound can hold in the face of elevated forward PEs of between 16x-17x. Hence, we reaffirm our FBM KLCI fair value of 1,770 for this year, and 1,880 for 2014. That said, post-Budget 2014 still provides some great opportunities for stock picking. In this report, we highlight the prime beneficiaries.

- GST of 6% would be implemented on 1 April 2015, replacing the current sales tax of between 5%-10%. Cellular players may pass down taxes to consumers, given the elimination of the current 6% service tax – which is currently borne by the celcos for prepaid users. Postpaid service tax, on the other hand, is currently borne by subscribers. DiGi is the biggest beneficiary from this potential move given that it has the largest proportion of prepaid revenue compared to Celcom and Maxis. Circa 84% of DiGi’s subscribers comprise prepaid users compared with 78% for Celcom and 75% for Maxis. In terms of revenue, we estimate c.73% of DiGi’s service revenue to be derived from the prepaid segment versus 58% and 49% for Celcom and Maxis, respectively. We upgrade DiGi to BUY from HOLD with a higher fair value of RM5.70/share (vs. RM4.70/share previously). Axiata remains a BUY with a higher fair value of RM7.90share (vs. RM7.40/share previously). Meanwhile, Maxis remains a HOLD, but with a higher fair value of RM7.40/share (vs. RM6.55/ share).

- The real property gains tax (RPGT) would be raised to 30% for a holding period less than three years, 20% in Year 4 and 15% in Year 5. Like before, no RPGT would be applicable for a holding period exceeding five years. The stamp duty structure and loan-to-value ratio remain status quo. Some moderation in speculative buying is likely but the impact is not expected to be significant because RPGT is an exit tax. More importantly, the regulatory overhang is now removed. Residential pre-sales would surely re-accelerate in the coming months. We are BUYers of Mah Sing, IJM Land and E&O; the latter is our latest initiation. We expect E&O’s NAV to more than triple to RM4.61/share upon receiving regulatory approvals to commence reclamation works for STP II.

- Banks are no longer allowed to provide final funding for projects involved in the Developer Interest Bearing Scheme (DIBS). However, this was already widely expected, with minimal impact as the loans from DIBS generally contribute about 2% to 3% of total loans. GST is expected to be imposed on fee income and not on the loan portion, although exact details have yet to be spelt out. Public Bank is our only BUY for its consistent earnings delivery and good dividend track record.

- Even though the focal point of Budget 2014 continues to be on the government’s commitment to reduce the fiscal deficit, several infrastructure projects would nonetheless be implemented. IJM looks set to leverage on the rollout of two major projects, namely the West-Coast Expressway and the Kuantan Port expansion. Both projects may signal a long-awaited turnaround of IJM’s construction division with the normalisation of profit margins. We estimate that both projects may almost triple its order book to RM8.0bil. Both Gamuda and WCT with their respective Chinese partners are among the three finalists for the RM8.0bil Gemas-JB rail line. IJM is our top pick in the sector.

- The ‘sin’ sectors – brewery and gaming – were spared from higher duties although there is the perennial risk of a tax hike off-Budget, like in the case of the 14% hike in excise duty last month for the tobacco sector. Nonetheless, we are still cautious about prospects for the brewers because of shrinking MLM volume and limited room for dividend surprises. We like Genting Bhd as its share price would be supported by a special dividend of RM0.50/share. It also offers a cheaper exposure to Genting Singapore with an acquisition-driven growth.

- Tenaga is a BUY. We expect Tenaga’s 4Q results (to be released next week) to be strong, which may trigger upward revisions to its EPS and fair value. The earnings surprise may come from lower-than-expected coal prices, currently averaging at US$80/tonne vs. our assumption of US$85/tonne. A US$5/tonne reduction would raise our DCF valuation by 12% from RM10.45/share to RM11.70/share. Additionally, we expect improved earnings transparency from Tenaga’s gradual implementation of incentive-based regulatory initiatives, which will facilitate an automatic cost-pass through tariff-setting mechanism. Competitive bids for new power plants, such as the upcoming 2,000MW greenfield coalfired power plant, would contribute to the moderation in Tenaga’s overall unit cost per kWhr. The stock currently trades at an attractive P/BV of 1.5x vs. its 5-year range of 1x-2.7x.

- The implementation of the GST will have no impact on glove manufacturers’ earnings as gloves, which are mainly for exports, are levied a zero-rated output tax. They can, however, take advantage of the input tax credit mechanism to claim GST incurred on their raw materials. Our top BUYs are Top Glove Corp for its volume play and its move up the value chain to nitrile (currently 25% of sales but growing to 50% in three years), and Kossan for its cheaper valuations. Elsewhere, Berjaya Food may see better profit margins as the implementation of GST would replace the current sales tax (5%-10%) and service tax (6%). Following its recent product price increases for Kenny Rogers Malaysia, SSSG has turned positive while its Indonesian operations are coming along nicely.

Source: AmeSecurities