Budget 2019 is seen as a comprehensive reform budget intended to reset the fiscal process and recognise one-off tax refunds that acts as a stimulus to the private sector. Its 2019 GDP target of 4.9% could see some downside risk. From an equity market perspective, there were pains from taxes and higher minimum wage while goodies were focused on the B40. Sector wise, healthcare seems to be the winner while aviation and gaming are losers. The impact is mixed for property and consumer. We cut our KLCI target from 1,830 to 1,780. For the top picks, we remove MAHB and Genting, replacing them with KPJ and TIME.

A reform Budget. 2019 Budget is essentially a comprehensive budget intended to reset the fiscal process to broaden revenue stream, streamline spending and recognise one-off tax refunds that act as a stimulus to the private sector. Measures were undertaken to maintain support to the consumption sector, albeit at a more targeted approach. While government’s GDP projection of 4.9% in 2019 sits at the lower end of the government 4.5-5.5% range, we think there remains downside risk to this forecast arising from external risks and domestic challenges.

Higher fiscal deficit from one-off tax refunds. Notwithstanding the one-off tax refunds and associated special PETRONAS dividend, underlying fiscal deficit would be smaller at -3.0% of GDP instead of -3.4% for 2019. Nevertheless, fiscal numbers appear broadly realistic, with potential revenue upside following introduction of new taxes and levies. Additional revenue could also emerge should crude oil price averages well above assumption of US$60-70/bbl in 2019-2021.

A challenging Budget 2019. From an equity market perspective, the key headline economic numbers revealed were within expectations as they had pretty much been indicated during the 11MP MTR. Budget 2019 saw some pains from taxes and higher minimum wage but also some goodies which mainly focused on the B40 segment (income boosting measures, travel cost assistance, insurance, first home buyer incentives and rural infrastructure). Overall, we sensed a rather challenging tone faced by the new Pakatan Harapan government for Budget 2019 but this was rather expected given the reform transition period that it is now steering Malaysia through. We are pleased with some of the institutional reform measures (zero-based budgeting, Fiscal Responsibility Act, new Government Procurement Act and shift towards accrual accounting from cash accounting) which should help positon Malaysia as a reform-play over the medium term.

Sectorial impact. Budget 2019 appears to be positive for healthcare (health insurance for the B40) but negative for aviation (departure levy) and gaming (tax increase). Sectors that witnessed a mixed impact were consumer (income boosting measures but hit by soda tax) and property (RPGT and stamp duty increase but there were also measures to assist first home buyers). Surprisingly, construction which usually is a focus sector in previous Budgets, saw minimal impact.

Cut KLCI target to 1,780. The lower headline economic numbers during Budget 2019 and 11MP MTR highlights Malaysia’s challenge of walking a tight rope between boosting income and fiscal prudence. KLCI earnings growth of 2% for 2018 and 3.6% for 2019 remains uninspiring, below its post-GFC CAGR of 7%. Our KLCI target is reduced from 1,830 to 1,780 based on 15.4x P/E (-1SD) tagged to 2019 earnings. For our top picks, Genting and MAHB are removed (both Budget 2019 losers) and we replace with KPJ and TIME.

Source: Hong Leong Investment Bank Research - 5 Nov 2018