Budget 2019 will likely excite the market due to the absence of inheritance and capital gain taxes. Fears over a tighter budget were also laid to rest when the Finance Minister announced 2019 revenue growth of 10.7%. Importantly, the Budget exhibits fiscal discipline (targeted subsidies at fuel and financial aid for the B40 households) and tax revamps (double taxation) to curtail inflation. While some new taxes are introduced and levies imposed, there is nothing that will hurt the B40s. Instead, the latter gets a major shot in the arm with various stimulative measures. Overall, the government demonstrates fiscal responsibility to improve its budget deficit in the coming years, while introducing plans to support economic growth. Meanwhile, a RM37bn fiscal stimulus from the tax refunds could be the needed shot in the arm for this “sleepy tiger”. Maintain Overweight and 2018E year-end target of 1,845 (based on 18.4x 2018E earnings).

An Unsurprising Fiscal Deficit Reset

The Budget for 2019 will be supportive of domestic demand, especially with the proposed tax and expenditure measures. Government’s total revenue is expected to be higher by 7.3% this year, and increase further by 10.7% in 2019, while operating expenditure is also expected to increase by 8.2% in 2018 and 10.4% in 2019. The overall balance will increase to RM53.3bn in 2018 (initial Budget 2018: RM39.8bn) and improving to RM52.1bn in 2019. Fiscal deficit is projected to increase significantly from -2.8% of GDP in the initial Budget 2018 to -3.7% of GDP in 2018 and -3.4% of GDP in 2019, taking into account the RM37bn in unpaid tax refunds that were not disclosed by the previous government.

Sustained Economic Growth Despite Global Headwinds

The Ministry of Finance (MOF) projects the country’s real GDP growth of 4.8% yoy in 2018, implying a slower growth of 4.7% in 2H18, from 4.9% in 1H18. For 2019, MOF expects real GDP growth to increase slightly to 4.9%, supported by healthy domestic demand. This is broadly in line with our GDP growth forecast of 5% yoy in 2018 and 2019 respectively.

Key Sector Implications – Consumers (+ve), Gaming (-ve)

Sectorial impact is broadly neutral although the Consumer sector is pumped with a myriad of measures (higher minimum wages, lower public transportation fares, toll rate removal for motorcyclists, freeze on toll hikes for intra-city tolls nationwide and continued financial aid through Bantuan Sara Hidup) to pump prime domestic demand. A clear cut loser is the Gaming sector (downgrade to Neutral) which sees higher licence fees, casino duties and lower special draw days. No additional sin taxes were implemented, also a relief to the brewers and tobacco players.

Maintain Overweight and End-2018 KLCI Target of 1,845

The KLCI could benefit from a relief rally as initial concerns over additional taxes and a tighter budget were overblown. The inaugural budget by the new government which addresses its fiscal position appropriately and coupled with strong measures to spur domestic demand is a positive. We remain Overweight on the KLCI. Our 2018 year-end target remains unchanged at 1,845. For stock selection, we make 2 changes – QL replaces Aeon Co and UMW replaces CIMB. Our other Top BUYs are Maybank, Serba, Tenaga, Kossan, KPJ, Aeon Credit, Globetronics and Supermax.

Source: Affin Hwang Research - 5 Nov 2018