Projected at RM322.5b, Budget 2021’s total expenditure is set to be the largest in Malaysia’s history. Despite a significant increase in development expenditure of RM19b (to RM69b) and RM10b increase in operating expenditure (to RM236.5b), the MoF projected the budget deficit to be contained at RM85b (-5.4% of GDP vs RM87b or -6.0% in 2020), thanks to an expected increase in revenue and reduced Covid-19 Fund. Overall, this is a mildly positive Budget for the stock market. There are no major sector losers and positive is the higher allocation for development that will finally see the start of MRT3. But in an economy still plagued by the pandemic, the Budget was rightly tilted towards providing aid for the financially vulnerable social groups. These measures are not so much a boost as they are a relief to the affected B40, M40 and SMEs. The sectors benefitting from increased spending are Construction, Healthcare, and Consumer while the Banks gain to some extent from measures to preserve jobs and financial support given to borrowers. Meanwhile, rubber glove players benefit from absence of windfall tax. Our year-end FBMKLCI target remains at 1,603, which represents a 16.8x forward PER on FY21 earnings. We reiterate our Top Picks - GAMUDA (OP; TP:RM4.10),GENM(OP; TP: RM2.75),HLBANK(OP; TP: RM17.00), INARI (OP; TP: RM3.14),HARTA (OP, TP: RM26.22),JHM(OP, TP: RM2.00),KLCC (OP, TP: RM8.55), MRCB(OP; TP:RM0.75), TENAGA (OP; TP: RM13.95), and TM (OP, TP: RM4.95).

The Budget: Against socio-economic challenges posed by Covid-19, Budget 2021’s thrust is anchored on three goals of firstly, protecting the peoples’ well-being; secondly, ensure continuity of businesses and thirdly, economic resilience. As expected, significant allocations were given for the welfare of the people especially the B40 and SMEs. Sabah and Sarawak yet again stood prominently as recipients of development funding.

Construction - from worst to best - a big winner: Most telling to us is MoF’s estimate that the construction sector is expected to recover sharply by 13.9% in 2021 – the highest growth sector - from being the worst with a contraction of 18.7% in 2020. Thanks to the start of the 5-year 12th Malaysia Plan which will see year one starting off with a whopping RM19b increase in development spending from RM50b to RM69b, we should finally see the start of MRT3. While HSR remains a long shot, other projects covered under this RM15b allocation are the on-going Pan Borneo and Gemas-JB Electrified Double Tracking project and the yet-to-start JB SG Rapid Transit System Link.

East Malaysian construction players are beneficiaries too: This is because for 2021, Sabah and Sarawak continue to receive development expenditure of RM5.1b and RM4.5b, respectively. At 14% of total development expenditure, the combined amount remains unchanged from last year to fund upgrading of water, electricity and road infrastructure. Beneficiaries are CMS (NR), Sarawak Cable (NR), SCIB (NR) and HSL (OP, TP: RM1.25).

Rubber gloves makers gain on absence of windfall tax and local hiring incentive: Positive is that there was no announcement of windfall tax for glove makers. Instead, the Big Four glove makers will contribute RM400m to fund the fight against Covid-19 that includes vaccine and health equipment costs. In our view, RM400m is immaterial to the glove makers considering that their combined market capitalisation is RM170b. In fact, glove makers along with the construction and plantation sectors which are highly reliant on foreign workers would benefit from the incentives under PenjanaKerjaya. This involves a special incentive of 60% of monthly wages whereby 40% is channelled to the employer for hiring local replacements with the balance 20% incentive as wage top-up. This incentive will be given for six months. Overweight TOPGLOV (OP, TP: RM10.68), HARTA (OP, TP: RM26.22), KOSSAN (OP, TP: RM8.55) and SUPERMX (OP, TP: RM12.75)

Measures to support those affected by a weak jobs market relieve some risks off the banks: To address the debt servicing challenges faced by vulnerable borrowers, the targeted loan repayment assistance (TRA) programme is extended to B40 borrowers and micro enterprises in the form of three months of moratorium or for six months at 50% of monthly repayment commencing Dec 2020. We note that BNM has come out to state separately that for hire purchase loans and fixed rate Islamic financing, borrowers seeking repayment assistance will need to sign new agreements. If this means that banks will be able to charge additional interest during the moratorium period, it will put to rest further issues on modification losses. Otherwise, we estimate the immediate impact of 1-2% at worst on FY21 sector net profit can be expected, but this is probably worth bearing as it gives the affected borrowers more time to restore their financial conditions as economic conditions hopefully improve next year. Top picks in this sector are HLBANK (OP; TP: RM17.00), PBBANK (OP; TP: RM18.00), RHBBANK (OP; TP: RM5.75) and AMBANK (OP; TP: RM3.60).

Consumption benefits from income tax relief: A reduced income tax of 1% for chargeable income band of RM50k-70k will benefit 1.4m tax payers. Positive also is the raised income tax exemption limit to compensate for the loss of employment from RM10,000 to RM20,000 for each full year of service. Specific to the tobacco sector, incumbent BAT (OP; TP: RM11.05) should likely benefit from initiatives to curb the import of cigarettes by freezing new import licenses while tightening of renewals and restricting transhipments to selected ports only will curb the selling of contrabands. And, a 10% excise duty imposed on vape and electronic cigarettes which takes up an estimated 10% market share lessens the competitiveness of these substitutes. CARLSBG (OP; TP: RM24.25) and HEIM (OP; TP: RM22.95) benefit from the absence of excise duties increase.

Consumption also supported by extensions of cash aid via Bantuan Prihatin Nasional (BPN) and Bantuan Sara Hidup (BSH): BPN was extended as BPN2.0 in 2021 with RM2.2b allocation while BSH which has been renamed BPR (Bantuan Prihatin Rakyat) is allocated RM6.5b targeting 8.1m beneficiaries compared to BSH with RM5b benefitting 4.3m. These are to help cover expenses of the B40 group; hence, supporting consumption of basic living essentials. Other support measures are special financial assistance of RM600 to be paid to civil servants Grade 56 and below and RM300 for retirees to be paid early 2021 which we estimate to amount to RM1.2b.

Minimum employee EPF contribution will increase 2% to 9% from Jan to Dec 2021 – neutral impact to consumer sector: If not for the measure to reduce minimum employee EPF contribution from 11% to 9%, the current minimum 7% contribution effective since Apr 2020 would have been restored to 11% by Jan 2021. This announcement sets the new minimum at 9% instead. While this 2% increase may be a bane to members’ immediate cash flow, the monthly withdrawal of up to RM500 from Account 2 under iLestari is still effective but ends in March. For those who lost their jobs, they are allowed RM500 monthly withdrawal from Account 1 up to 12 months from Jan 2021 as relief. On balance, we see a neutral impact on consumption.

Healthcare sector benefits from expanded healthcare spending and expanded tax relief: Among others, over RM3b was allocated for vaccine procurement and RM1b for funding public health service needs including purchase of PPE, reagent and consumables and special monthly allowance of RM600 for front-liners in addition to RM500 one-off payment. Tax relief is also provided for a range of vaccinations including Covid-19 up to RM1,000 per individual. Pharmaceutical products manufacturers that include vaccines are also given incentives to invest in Malaysia that entails preferential tax rate of 0 to 10 percent for 10 years. Raised tax relief on medical expenses for serious disease from RM6k to RM8k and for medical check- ups from RM500 to RM1000, including special needs and parental care from RM5k to RM8k should see more hospital consultations that benefits the likes of KPJ (OP; TP: RM1.00), IHH (UP; TP: RM4.56), SUNWAY (OP; TP: RM1.57) and PHARMA (UP; TP: RM1.80)

A mild positive for the telco sector is the RM1.5b credit to 83m B40 individuals (RM180/pax) that could help sustain usage of mobile services though the impact may be small as this amounted to less than 5% of the combined annual revenue of the four listed telcos. While we welcome the allocation to enhance internet connectivity and broadband access via the JENDELA programme, these are not new and have been already earmarked for capex by the telcos.

Widening social protection benefits Takaful operators and life insurers: To address the low insurance penetration rate, withdrawals from EPF Account 2 to purchase insurance and takaful products for life and critical illness coverage will be allowed, while individual income tax relief for PRS contributions will be extended until 2025. These will benefit TAKAFUL (MP; TP: RM5.25) and life insurers ALLIANZ (NR) and MANULFE (NR).

Negligible impact on listed airlines and tourism/retail plays: The 9-month wage subsidy program will be extended by three months, this time targeting only the tourism and retail sectors at RM600 per month for workers earnings RM4,000 and below but the cover limit is raised from 200 employees to 500 per application On a per application basis, this works out to a maximum of just RM900k. And, the total allocation is smaller at just RM1.5b compared to RM15b previously which applied to a wider range of industries. We reckon that this will have greater impact on small unlisted players in these sectors. No material benefit for listed tourism-related stocks despite 6- month exemption from HDRF levies (comprising just 1% of monthly wages) and the RM50m for training and placements for airline companies’ employees seem rather low

Source: Kenanga Research - 9 Nov 2020