From the perspective of the equity market, the Budget 2018 could be a NEUTRAL event, as most of the “goodies” dished out have no significant impact to corporate earnings of listed companies, although a few notable companies could enjoy direct benefits. As such, we maintain our FY17F and FY18F net earnings growth rates of 0.4% and 4.6%, respectively. We also maintain our end-2017 Index Targets of 1,830 (~18x/17x to FY17F/18F earnings estimates). Sector-wise, Consumer sector appears to be the biggest beneficiary. Non-bank Money Lenders, Airlines, Manufacturers (Gloves / Plastic Packagers / Semicon) could see meaningful direct and indirect positive impacts from the proposed Budget. However, we are rather Neutral on Automotive, Construction and Property sectors despite the announced incentives and measures. On individual stocks, we believe AZRB, ATLAN, MYEG and MRCB could be the clear-cut beneficiaries. Market timing wise, despite the current weakness we still believe the current levels provide excellent "Buy On Weakness" opportunities.

The 2018 Budget. Prime Minister (PM) announced the 2018 Budget last Friday on 27/10/17. The theme of this Budget is "Prospering an Inclusive Economy, Balancing between Worldly and Hereafter, for The Wellbeing of Rakyat, Towards The TN50 Aspiration" based on eight (8) main thrusts: 1. Invigorating Investment, Trade and Industry 2. Moving Towards TN50 aspiration 3. Empowering Education, Skills and Trainings, and Talent Development 4. Driving Inclusive Development 5. Prioritising the Wellbeing of Rakyat and Providing Opportunities to Generate Income 6. Fortifying the Fourth Industrial Revolution and Digital Economy 7. Enhancing Efficiency and Delivery of Government-Linked Companies and Public Service 8. Balancing between the Worldly and Hereafter The proposed Budget allocates a sum of RM280.25b (vs. RM260.8b in 2017), of which, RM234.25b (~83.6% of the total budget) is set for operating expenditure while the remaining RM46.0b (or 16.4% vs. 17.6% in 2017) is allocated for development expenditure. This set of budget is backed by expected government revenue of RM239.86b, implying a fiscal deficit of 2.8% to 2018F GDP (vs. 3.0% in 2017). As the country's fiscal deficit is expected to show improvement, we are hopeful to see firmer stability in foreign capital flows as well as the local currency exchange rate.

Market Neutral, but Definitely People Friendly. We have no doubt about the friendliness of the proposed 2018 Budget for the people. In fact, the proposed incentives and measures are well-designed and all-rounded. Nonetheless, the Budget could be fairly muted for the equity market as we see a less significant impact to (corporate earnings of) listed companies while there are still some beneficiaries worth noting such as AZRB (TB, TP: RM1.35), ATLAN (TB, TP: RM5.60) MYEG (TB, TP: RM2.80) and MRCB (OP, TP: RM1.14).

AZRB is likely to benefit from one (1) of the five (5) economic corridors development; namely, Tok Bali Industrial Park. ATLAN, on the other hand, will benefit from another economic corridor, which is the Bukit Kayu Hitam Duty Free Zone. Besides, the proposed incentives to boost tourism and the abolishment of toll collections at Bukit Kayu Hitam (Kedah) and Eastern Dispersal Link (Johor) could stimulate the Group's duty-free revenue and potentially spur development of its Bukit Kayu Hitam land (please refer to Appendix for details). MYEG could see great potential as government allows employers to hire foreign domestic helpers directly without the agent, and MYEG is currently already providing Maid Working Permit Renewal services. The abolishment of toll at EDL could also indicate a potential takeover move of the highway by government which will be positive for MRCB as well.

Sector-wise, we reckon that the Consumer sector could see a direct/indirect positive impact from a personal income tax cut. Apart from Aviation sector, especially Airlines, we also believe the incentives and efforts to promote tourism could boost Consumer Retail as well. Moreover, as there were no adverse tax proposals from Consumer Sin sub-sector, the Consumer sector could be the biggest beneficiary under the just-announced budget. As such, stocks that derive sales predominantly from the domestic market, especially involve in the retail sub-segment, are likely to be significant beneficiaries. These stocks include supermarket operators, i.e. AEON (MP, TP: RM2.20), PARKSON (OP, TP: RM0.88); and certain F&B players - DLADY (MP, TP: RM54.15), NESTLE (MP, TP: RM83.90), F&N (MP, TP: RM24.95) and SPRITZER (MP, TP: RM2.20).

Non-Bank Money Lender such as AEONCR (OP, TP: RM13.13), MBSB (OP, TP: RM1.45) and RCECAP (TB, TP: RM1.50) should also feel the spill-over effects from the above-mentioned budget proposals. While Automotive players such as DRBHCOM (MP, TP: RM1.70) and possibly TCHONG (UP, TP: RM1.45) and UMW (MP, TP: RM5.77) could benefit from the proposal for the registered taxi driver to purchase new taxi, the impact to the sector could be negligible, as the potential demand may only account for c.3% of our TIV estimates.

(i) Gloves, (ii) Plastic Packaging, and (iii) Technology (including Semi-con) sectors should benefit from the extended incentive period for Accelerated Capital Allowance (ACA) on automation equipment for 2018-2020 as well as ACA Incentive up to 200% for manufacturing and manufacturing-related-services sectors. However, we do not expect any significant impact from ACA. Nonetheless, it should encourage manufacturers to steer towards greater applications of automation, leading to higher productivity in the future.

Property sector, on the other hand, should see Neutral-to-Positive potential impacts as one of REHDA’s major wish-list was met i.e. the special end-financing scheme for PR1MA (up to 90%-100%) extended to the private sector to incentivize developers to focus on increasing supply for this segment. However, the measure will at best increase the odds of developers meeting their sales targets instead of exceeding it or pushing targets into an overdrive mode.

Despite the announced list of mega projects, the impact to Construction sector could probably be Neutral, at least in the short-to-medium term. This is because the 2018 Budget was within expectations as it did not have any major highlights as compared to Budget 2017. Most of the proposed infrastructure projects have been announced/awarded i.e. ECRL, HSR, WCE and MRT2. However, it provides more clarity on the timeline for the completion of HSR (2026), MRT3 (2025) and LRT3 (2021), despite not having any information on the commencement date of these projects, except for ECRL where construction works is set to commence next year. Moreover, there weren’t any budgeted amounts announced for these projects, i.e. MRT3 and HSR (expected to be at c.RM70.0-80.0b) as the execution timeline is still far ahead.

Nonetheless, it is still believed that bigger contractors such as GAMUDA (MP, TP: RM5.45), IJM (MP, TP: RM3.48), SUNCON (MP, TP: RM2.29), WCT (MP, TP: RM1.83) would stand a better chance in winning such bigticket projects while the smaller players like MUHIBAH (MP, TP: RM2.94), MITRA (MP, TP: RM0.95), GADANG (Not Rated, TP: RM2.44) and HSL (MP, TP: RM1.40) would benefit from jetty, road and hospital works.

All told, we reiterate that the proposed Budget is well-designed and all-rounded. And as such, it has diluted impact to the equity market in the short-run. Hence, we maintain our FY17F and FY18F net earnings growth rates of 0.4% and 4.6%, respectively. Our earnings estimates are backed by our real GDP growth target of 5.4%/5.2% for FY17F/FY18E (vs. MOF's forecasts of 5.2%-5.7% for 2017 and 5.0%-5.5% for 2018). We also maintain our end-2017 Index Targets of 1,830 (~18x/17x to FY17F/18F earnings estimates). Our end- 2018 Index Target is tentatively pegged at 1,860 as per our Bottom-Up approach and implies FY17F/FY18F PER of 18.1x/17.3x. Timing-wise, despite the current weakness (as FBMKLCI could have traced out a "Double-Top" pattern with a measurement target of 1,720/00), we still believe the current levels provide good opportunities for our Buy On Weakness (B.O.W.) strategy. Recall that the FBMKLCI is now trading at a discount of >6.0% against the consensus index target of ~1,870, which is our ideal B.O.W. zone of 1,750/20 (implying -1SD/-2SD levels).

Source: Kenanga Research - 30 Oct 2017