We are NEUTRAL over the revised 2015 Budget. In short-and-medium term, we reiterate our conviction in export-oriented industries and the construction sector. We also like GST beneficiaries and sectors/stocks that are resilient. Thus far, market remains weak but could have formed a temporary bottom given that: (i) the PER-multiple discount between FBMSC & FBMKLCI (see Figure 1) as well as (ii) the discount between FBMKLCI and consensus (see Figure 2) are fast approaching their respective -2SD levels. Nonetheless, risk of further downgrading remains. We do not rule out potential downgrade in FBMKLCI’s PER multiple. Based on historical Fwd. PER Band of FBMKLCI, the Fwd. PER could be in the midst of reverting back to its 3-year mean (~16x) and negative 1SD-level (~15x) (see Figure 3). This expectation is also reinforced by the lowering of consensus target price of FBMKLCI. Consensus target of FBMKLCI has been revised down from 1,955 (the high) to 1,855 recently. As such, while we maintain our end-2015 Index Target of 1,905 (implying 17.7x FY16 PER on the back of 4.7% and 7.4% growth in FY15 and FY16 earnings), we will consider trimming our target PER should the upcoming corporate results are again weaker than expected. As an indication, should we lower our target PER from 17.5x to 16.5x, our end-2015 index target would be lowered to 1,860 (from 1,905).

Recall that the original 2015 Budget was formulated based on the following assumptions; such as (i) Price of Brent Crude Oil at USD100 per barrel, (ii) GDP growth estimated between 5% and 6%, (iii) a stable exchange rate of RM3.20 against the US dollar, and (iv) 2015 world economic growth projected at 3.4% and 3.9% by the World Bank and IMF, respectively. Therefore, the fiscal deficit was forecasted to improve from 3.5% in 2014 to 3% of GDP in 2015.

What have changed? Since then, Brent Crude Oil fallen below USD50/barrel, Ringgit has depreciated to RM3.60 against the US dollar and the World Bank and the IMF have also revised global growth to 3% and 3.8%, respectively. As such, via the reduction of government’s operating expenses and higher export growth as well as potential better-than-expected additional tax collection from GST, Prime Minister (PM) said the new fiscal deficit for 2015 is at 3.2% of GDP (vs. 3% previously) based on a new Crude Oil assumption of USD55/barrel. Without any fiscal measures, the sharp decline in oil prices would have brought the fiscal deficit to 3.9%. As such, the concern over reduction in government’s oil revenue should ease henceforth. At the same time, PM also maintains the original development expenditure and some major projects such as MRT2, LRT3 and HSR (Kuala Lumpur – Singapore High-Speed Rail).

NEUTRAL. While we are neutral over the revised 2015 Budget, we continue to believe that: (i) the construction sector and (ii) export-oriented industries will be the major growth engines in 2015 in view of the implementation of GST in April, which could potentially cap domestic consumption by at least two quarters.

For the construction sector, we are positive on the announced Budget revision. This is premised on the fact that (i) PM maintained the RM48.5b development expenditure that was announced in last year's Budget 2015 despite the falling crude oil prices which may impact the government's revenue, (ii) PM also announced that the mega rail infrastructure projects namely MRT2, LRT3 and HSR will continue as planned, and (iii) the recent floods infrastructure damage is estimated at about RM2.9b and the government gives priority to local contractors to undertake the reconstruction works. We believe this should allay market's concerns on the possible delay or scrapping of mega projects due to the falling crude oil prices. Hence, we reaffirm our view that the orderbook replenishment prospects for contractors in the near-medium term remain bright. In fact, PM also announced yesterday that it will table 11MP in May 2015 to outline the development expenditure until 2020. Additionally, we believe that the reconstruction of infrastructure coupled with flood mitigation programs after the recent floods may benefit small-mid cap contractors namely MUHIBAH (OP; TP: RM3.63), AZRB (NR), ZELAN (NR), TRC (NR), FAJARBARU (NR), MRCB (MP; TP: RM1.27, and MITRA (TB; TP: RM1.13). All in, we maintain our OVERWEIGHT stance on the sector with unchanged top pick of GAMUDA (OP; TP: RM5.29) and MMCCORP (OP; TP: RM3.21).

As for export-driven sectors, they will continue to benefit from weak ringgit. While PM highlighted that the ringgit exchange rate will over time adjust to reflect Malaysia’s strong fundamentals, we do not rule out that the lower deficit target coupled with the volatile crude oil could still put pressure on ringgit. Hence, we will continue to focus on sectors such as E&E, OEM Manufacturers, Gloves and Plastics Packaging players, to a certain extent. HARTA (OP, TP: RM7.36), MPI (OP, TP: RM6.80) and VS (TB, TP: RM3.56) remains as our 1Q15 Top Picks.

It was also announced that there will not have any tariff revisions for electricity and gas in 2015. We reckon that the decision not to revise tariff this year is a wise decision as the cascading effect on tariff hike is tremendous. More importantly, this decision should have NEUTRAL impact on TENAGA's earnings as the current fuel cost pass-through mechanism will address the fuel cost adjustment issue. In fact, we had earlier mentioned in our 1Q15 Sector Strategy piece that any tariff hike in the upcoming June-Review could be lower than the previous one due to the ICPT fund and weakening of fuel prices. Hence, even without any tariff revisions, we maintain our OP-rating and TP of RM14.65 on TENAGA.

Source: Kenanga