We feel that MOF’s 2020 GDP forecast of 4.8% is on the optimistic end (vs ours at 4.4%) but its fiscal deficit target of -3.2% is within our expectations. Unlike its austerity sounding predecessor, Budget 2020 certainly heard a change of tone. Broadly, there were more income boosters and initiatives to attract FDIs and domestic investments. Key sectorial winners are property, plantations, tech, construction and VMY2020 plays (aviation, healthcare and REITs). Possible losers (albeit mildly) are NFOs and banks. From an equity perspective, we are relatively positive on Budget 2020. Our 1-year KLCI target is at 1,660.

Optimistic GDP projection of 4.8% for 2020. On the supply side, MOF is projecting growth to be driven by slight increase in services, manufacturing and acceleration in construction, offsetting the moderation in agriculture and mining. On demand front, Malaysia’s GDP will be driven by increase in domestic demand that offset lower net exports. Inflation is expected to be higher at 2.0% YoY (2019: +0.9% YoY), from the low base effect and removal of blanket petrol price subsidy. Following the resumption of infra projects that is anticipated to drive imports higher, CA is expected to moderate further to RM29bn in 2020 at 1.9% of GNI from RM43.4bn at 2.9% of GNI. MOF’s forecast of faster-than-expected 2020 GDP at 4.8% (2019: 4.7% YoY) is premised on the assumption global growth forecast is stronger at 3.5% YoY (2019: 3.2% YoY) with positive implications on domestic activity. However, as trade tensions remain, slowdown in advanced economies persists and risk of no-deal Brexit linger, we see some downside risk to overall global and Malaysia GDP (HLIB forecast of global and Malaysia: 3.0% YoY and 4.4% YoY; 2019e: 3.0% and +4.5% YoY).

MOF headline deficit of -3.2% of GDP, within expectations. While headline deficit was within our expectation, total spending and revenue was larger than our estimates. In light of high downside risks to global growth, the government has decided to front load allocation for development spending to accelerate implementation of projects. This is expected to provide high multiplier to the economy. Nevertheless, in keeping with the fiscal deficit of -3.2% of GDP, the higher spending needs to be financed with higher revenue collection. In MOF’s projection, this is expected to be driven by faster growth in corporate income tax revenue and SST income. However, high global uncertainty emanating from prolonged trade tension, slowdown in major economies and geopolitical uncertainty may overwhelm corporates and limit investment activity, posing downside risk to total revenue collection. Nevertheless, we opine the fiscal deficit of -3.2% of GDP is achievable as government manages the pace of spending, consistent with the needs and pace of the domestic economy.

Front-loading development expenditure for economic sector. Government will front load their spending by allocating a larger portion of DE in 2020 (RM56bn). Based on Medium-Term Fiscal Framework 2020-2022, the average DE is RM53bn/year. This pre-emptive spending will be directed towards the economics sector, with allocation primarily for transport, energy and public utilities as well as agriculture and rural development sub-sectors. Out of the RM56bn, RM53.5bn is in the form of direct allocation mainly for accelerating the implementation of projects (MRT2, KVDT, Pan Borneo Highway and maintenance of roads, bridges and highways). The increase in DE is also allocated for the rationalisation plan of FELDA, Tabung Haji and debt servicing commitment for SRC International Sdn Bhd.

Higher operating expenditure, focused on supply and services, grants to statutory bodies and subsidies and social assistance. Operating expenditure is also expected to increase with largest increase directed to supplies and services mainly due to higher outlays for repairs and maintenance as well as allocation for professional services. MOH and MOE are expected to receive 44% of total allocation. Grants to statutory bodies are also anticipated to receive higher allocation due to operational expenses from public universities and teaching hospitals. To provide more assistance to targeted group, subsidies and social assistance is also expected to expand slightly following targeted assistance (BSH, fuel, agriculture related subsidies). The government is also allocating RM2bn contingency reserves, not currently included in the current calculation.

Higher revenue growth, contributed by rise in corporate income revenue and SST. The increase in spending is financed by rise in revenue growth, with faster growth expected to emanate from corporate income tax. MOF expects stronger collection from corporate income, due to better corporate earnings prospects and continuous efforts in enhancing audit and tax compliance. Over the medium term, government will continue to consider implementing measures proposed by Tax Reform Committee. Higher indirect tax is contributed from higher SST collection (28.3bn; 2019 revised estimate: 26.8bn; initial estimate: RM22.0bn), premised on higher consumption and tourist arrivals from VMY2020 and APEC 2020 meeting. PETRONAS annual core dividend is expected to be sustained at RM24bn, similar to previous year (oil price assumption for 2020: USD62/pb). The Government is also planning to dispose assets to generate revenue of more than RM3bn in 2020.

Sensing a change of tone. We certainly sensed a change of tone for Budget 2020 unlike its austerity sounding predecessor where a slew of new/ higher taxes were implemented; this should augur well for Malaysian equities. Save for a new personal income tax bracket for those earning >RM2m p.a. (estimated 2k people) at 30% (currently 28%), there were no new taxes introduced. On the broader scheme of things, subsidies and social assistance will increase marginally by 2.5% to RM24.2bn. Notable income boosters include (i) broader net for BSH recipients, (ii) Malaysians@Work scheme (RM6.5bn) to reduce unemployment and reliance on foreign labour and (iii) higher minimum wage from RM1.1k to RM1.2k in major cities. Focused was also placed to boost FDIs (targeting the Fortune 500) and domestic investment with RM1bn p.a. allocation for each.

Possible winners... From a sectorial perspective, property is a clear winner given the lower threshold of RM600k (from RM1m) for foreigners to purchase and revision of RPGT base year to 2013 (from 2000). The measure to implement B20 biodiesel for transport (end-2020) is positive for plantation; estimated to boost CPO demand by 500k/tonnes p.a. (c.20% of stockpile). On construction, this should benefit from slightly higher DE (+2.4%; 2019: -2.5%) and revival of project news flow (RTS, Bandar Malaysia and possibly Serendah-Port Klang Rail Bypass and the Klang Logistics Corridor). For tech, the positives come from (i) tax incentives for high value added activities in E&E to encourage OSAT players to embrace automation and (ii) promotion of e-wallets to increase transaction value to players like Revenue. With the rollout of VMY2020 targeting to increase tourist arrivals by 6.8% and tourist receipts by 8.5%, the beneficiary sectors are aviation, healthcare tourism and prime mall centric REITs. Apart from VMY2020, the other healthcare positives come from RM227m to upgrade medical equipment (Edgenta), pneumococcal vaccination for children (Pharmaniaga) and EPF withdrawal for fertility treatment (TMC).

…and losers. The reduction in special draw days for from 11 to 8 is slightly negative for NFOs (<2% earnings impact for BToto), although noting that this may be offset by the harsher penalties for illegal gambling operators. It was shared that BNM will finalise the digital banking framework by year end. At the onset, this seems slightly negative for banks given heightened competition for loans; however, we reckon the framework could be crafted more to serve the underbanked segment instead. The possible development of Pulau Carey will pose a competition for Westports in the long run, likely offsetting the benefits from the proposed Serendah-Port Klang Rail Bypass and Klang Logistics Corridor (facilitate cargo movement and reduce bottleneck).

KLCI target at 1,660. From an equity market perspective, we are relatively more positive on Budget 2020 vs its predecessor. Nonetheless, we take this opportunity moderate our 1-year KLCI target to 1,660 (from 1,670) after recalibrating its 5-year mean and SD. Our 1-year KLCI target is based on 16.5x PE (-0.5SD) tagged to 2020 EPS. Against its historical trend, KLCI valuations look compelling with (i) 1-year forward rolling PE below -1SD and (ii) earnings yield spread to MGS at >2SD. Furthermore, P/B is now at a 10-year low of 1.57x. With cumulative net foreign selling (since 2011) at -RM20bn, we are inclined to believe the exodus has peaked.

Source: Hong Leong Investment Bank Research - 14 Oct 2019