In a nutshell, the Budget announcement has cleared earlier concerns of capital gain tax (for equity investment), inheritance tax, carbon tax and sin taxes (except for gaming tax). Nonetheless, the higher-than-expected budget deficit numbers may keep foreign investors shying away from the local equity market in the short-term due to higher depreciation pressure on Ringgit despite Government’s efforts to improve the deficit numbers in the next couple of years. All in all, while the market could stage a further rebound from here, upside could be limited. Based on analysts’ latest inputs of earnings estimate and target price, we have fine-tuned our FY18E/FY19F earnings growth rates to 4.2%/0.4% (from 4.2%/1.4% earlier). As for end-2018/19 index targets, we have also revised them down to 1,765/1,870 (from 1,870/1,920 previously). These index targets represent ~14.7x and 15.0x PERs to the respective FY18E and FY19F earnings estimates. The major downgrades in index target were due to: (i) lower target PER of 15.0x instead of 15.5x earlier (for top-down approach) to account for pressure over Ringgit and foreign outflow, and (ii) downgrades in telcos and gaming stocks in terms of earnings estimates and target prices. As far as Budget 2019 is concerned, we reckon that (i) Property and (ii) Gaming sectors should see stronger impacts vis-à-vis others. Consumer F&B may also see some mixed impacts while for the plantation sector, it could be a non-event. Apart from reiterating our Top Picks – AEON (OP; TP: RM2.60), AIRASIA (OP; TP: RM4.05), BIMB (OP, TP: RM4.90), D&O (OP, TP: RM1.00), GAMUDA (OP; TP: RM3.35), MAYBANK (OP, TP: RM10.00), PESTECH (OP; TP: RM1.95), PPB (OP; TP: RM18.60), SERBADK (OP; TP: RM4.45), TAKAFUL (OP; TP: RM4.85) and TENAGA (OP; TP: RM17.90) – highlighted in our 4Q18 Strategy Report earlier, we also believe some of the heavily sold down stocks -HSPLANT (OP; TP: RM2.15), SLP (OP; TP: RM1.35) and UEMS (OP; TP: RM0.850) – worth considering.

The Budget: Budget 2019 will have 3 focus areas – (i) Implement institutional reforms, (ii) Ensure people's well-being, and (iii) Nurture a culture of entrepreneurship – as well as 12 main strategies to rejuvenate Malaysia's economic position as an Asian Tiger.

Macro condition: Government forecasts 2018/19 GDP growth at 4.8%/4.9% despite global uncertainties. The new Government is expected to collect RM261.8b revenue in 2019, including RM30b special dividend from Petronas. As such, the fiscal deficit is projected to be 3.7% for 2018; and for the next three years, the Government is committed to maintain a path of fiscal consolidation to achieve a deficit of 3.4% in 2019, 3.0% in 2020 and 2.8% in 2021. Over the medium term, the Government expect the deficit to be reduced further to the region of 2%.

Increasing tax revenue: To further enhance the Government’s tax revenue, services tax will be imposed on imported services. Besides, tax also is proposed for online services which will include transaction on software, music, and online advertising from Jan 1, 2020.

It is also proposed that annual gaming license fee for casinos will be raised from RM120m to RM150m p.a.. Gaming tax on casinos will also to be raised to 35% of GGR. Gaming machine dealer's license is also raised from RM10,000 to RM50,000 per year; and tax on gaming machines are also up from 20% to 30% of gross collection. At the same time, the Government will launch a Special Voluntary Disclosure Programme to allow taxpayers to voluntarily declare any unreported income as well.

As for the property sector, a 5% real property gains tax (RPGT) will be imposed, from 0% now (which is for the disposal of properties after 5 years from the date of purchase) for locals and PRs For companies and foreigners (non-PRs), RPGT will be doubled to 10% from 5% currently. However, the tax is exempted for lands, as well as lowcost and affordable housing under RM200,000. On the other hand, rate of stamp duty on property transfer worth more than RM1m will be raised by 1% from 3% currently to 4%. Meanwhile, REHDA agrees to cut house prices by up to 10% on new projects.

Source: Kenanga Research - 5 Nov 2018