Again, we have no doubt that Budget 2016 will benefit the Rakyat. However, it could be a non-event as far as the local equity market is concerned, as we see no major excitements. In fact, it was a slight disappointment for those who had expected corporate tax cut, including us. We reckon that most of the “goodies” that were dished out have no significant impact to corporate earnings, including the minimum wage revisions. As such, we maintain our FY15E and FY16F net earnings growth rates of 1.4% and 6.0%, respectively. On the other hand, while we have started to see some foreign capital inflow of RM1.6b of late (since 6 Oct15), this may not be sustainable given that the projected fiscal deficit of 3.1% in 2016 (vs. 2015E of 3.2%) may not be exciting to foreign investors and Ringgit has weakened again recently. Nonetheless, with the fresh capital injection by ValueCap into the equity market in November 2015 coupled with the favourable seasonal pattern; we believe these should be supportive to the market. Nonetheless, while we have revised our end-2015/16 index target to 1,715/75 (from 1,680/1,740 previously), we still prefer a S.O.S. strategy with a higher selling zone of 1,700/20 at this juncture, given that the upside potential could be limited from here, say ~4% at best. Having said that we see opportunities if the key index dips towards 1,645/10-range and would then recommend a B.O.W. strategy.

Budget 2016. Prime Minister announced the 2016 Budget last Friday on 23/10/15. This budget is the first budget to kick-start the 11th Malaysia Plan (11MP). The theme of this Budget is "Prospering The Rakyat" based on five (5) priorities as follows: (i) strengthening economic resilience, (ii) increasing productivity, innovation and green technology, (iii) empowering human capital, (iv) advancing bumiputera agenda, and (v) easing the cost of living of the Rakyat. The Budget allocates a total of RM267.2b (+2.5% vs. the revised RM260.7b in 2015) out of which, RM215.2b (~80.5% of the total budget) is set for operating expenditure and RM52.0b for development. This set of budget is backed by total expected government revenue of RM225.7b, implying a fiscal deficit of 3.1% to 2016F GDP. While the fiscal deficit has shown improvement, we do not expect strong foreign capital inflow as this positive indication could have reflected the recent net foreign inflow of RM1.3b into the equity market since 6 Oct 2015.

Muted-to-Disappointing? In a nutshell, we believe that this Budget springs no surprises on the local equity market as most of the “goodies” have no significant impact to corporate earnings. In fact, against earlier expectations, no corporate tax was announced despite the implementation of GST in 1 Apr 2015. As such, we maintain our

FY15E and FY16F net earnings growth rates of 1.4% and 6.0%, respectively, despite the minimum wage being revised up to RM1,000/month from RM900 for Peninsular Malaysia (vs. RM920/month from RM800 for Sabah, Sarawak and Federal Territory of Labuan) starting 1 July 2016. To our surprise, personal income tax for higher income earners was raised. It is proposed that the taxable income band for the highest tax rate be increased from 25% to 26% from those with an income of between RM600,00 and RM1,000,000. Meanwhile, for those with an income >RM1.0m, the tax rate will be increased to 28% from 25%.

As for impacts to various sectors (see Appendix for details), we believe the Budget is generally NEUTRAL to most of the sectors. However, we do see some sectors with positive tone. These sectors are: (i) Construction, (ii) Micro financiers or Non-bank Money Lenders, and (iii) Education. With regards to the Special Reinvestment Allowance, which has extended tax incentive for capital expenditure from 2016-2018, this measure should benefit manufacturers who are in expansion mode such as: (i) Gloves, (ii) Plastic Packaging, and (iii) Semicon players in general. At the same time, increasing hand-outs by the government to lower income group, should improve consumer sentiment. As for the minimum wage increase, while this could negatively impact plantation players and manufacturers, it will not have a significant impact to our earnings forecasts. This is because the hike in minimum wage was widely anticipated and has been incorporated into our earnings models and most of the manufactures have started to gear towards automation in their manufacturing processes.

Fine-tuning index targets. All in all, we reiterate that the revival of ValueCap, which is expected to start injecting fresh liquidity into the market in November 2015, and the favourable seasonal pattern to remain supportive of the local equity market. Recall that we have estimated that a 2% fresh capital injection into the equity market could fuel 2%-4% additional upside. By imputing a 2% minimum potential upside to the equity market coupled with the improved investment sentiment, we have fine-tuned our index end-2015 and end-2016 index targets to 1,715 and 1,775 from 1,680 and 1,740, respectively. Nonetheless, given that FBMKLCI is traded at a mere ~3% discount to its consensus’ target price of 1,760, representing +1SD-level above 3-year Rolling Average, the upside potential from here could be limited. Besides, At 1,715, this represents FY15E/16F/17F PERs of 19.4/18.1/16.8x (or 20.1/18.8/17.4x @ 1,775). As such, we reiterate our preferred S.O.S. strategy with a higher range of 1,700/20 (from 1,680/1,720 previously). However, we would turn more optimistic and switch into B.O.W. strategy if and when the key index dips towards 1,645/10, implying 6.4%/8.4% discount to the consensus target. For stock picks, we believe some of our 4Q15 Top Picks, such as KIMLUN (OP, TP: RM1.63), MPI (OP; TP: RM8.28), PHARMA (OP, TP: RM6.95), PWROOT (TB; TP: RM2.58), SLP (OP; TP: RM1.87) and TOPGLVE (OP, TP: RM10.60); to benefit from Budget 2016. 

Source: Kenanga Research - 26 Oct 2015