The Finance Minister delivered a RM332b expenditures package - the largest ever - for Budget 2022. Hugely expansionary, it seeks to support the economy’s early recovery momentum, while helping those badly impacted by the pandemic to get by the crisis. As with other support programs over the past year, SMEs and those mainly in the B40 and financially challenged groups were the main recipients of cash handouts and wage subsidies. Aside from certain measures to derive greater tax collections via a one-off “Cukai Makmur” and higher stamp duties on securities trading contract notes, there were few punitive measures to mention. The “green agenda” was also supported via incentives for ownership of electric vehicles and allocations to assist SMEs to adopt sustainable, low-carbon practices. Our year-end FBMKLCI target is adjusted downwards only slightly from 1,611 to 1601 on account of a one-off hit to EPS of 10.0 sen or 9%, representing an implied 16.3x forward PER on FY22E reduced EPS from 108.0 previously to 98.0 sen. We reiterate our Top Picks – DIALOG (OP; TP: RM3.50), F&N (OP; TP: RM33.15), GENTING (OP; TP: RM6.47), GHLSYS (OP; TP: RM2.30), KGB (OP; TP: RM2.50), MAYBANK (OP; TP: RM10.55), RHBBANK (OP; TP: RM6.10), TM (OP; TP: RM7.00), UZMA (OP; TP: RM0.75) and YINSON (OP; TP: RM7.35).

The Budget: Themed on “Strengthening Recovery, Rebuilding Resilience and Driving Reforms”, 2022’s large expenditures totalling RM332b is projected by the MoF to lead to a budget deficit of just 6% of GDP (KNK: 6.9%) versus 6.5% in 2021 (KNK: 6.3%) based on expected GDP growth of 3%-4% in 2021 (KNK: 3.5%-4.0%) and 5.5%-6.5% in 2022 (KNK: 5.5%-6.0%). That the fiscal deficit is projected to come in at just 6.0% versus our estimate of 6.9% was a surprise which we put this down to lower-than-expected Covid-19 Fund and Opex. At 6% of GDP, we believe MoF is suggesting a deficit of circa RM98b (KNK: RM112b). If so, the statutory debt to GDP ratio will rise to c. 63% which is manageable versus the recently raised ceiling of 65%. In terms of total direct debt (excluding off balance sheet Government Guarantees), the ratio is estimated at circa 67%.

Domestic consumption remains a bright spot given increased financial supports to the financially challenged. Consumption of essential goods remains supported given continued cash handouts in the form of RM8.2b Bantuan Keluarga Malaysia (BKM) to financially support the B40s, including single parents and the elderly that will benefit 9.6m recipients. This is larger than Budget 2021’s Bantuan Prihatin Rakyat (BPR) program that covered 8.6m recipients with an allocation of RM7.0b. And, the minimum employee contribution rate to EPF was maintained at 9% until June 2022 instead of being restored to 11%. In what could be a potential boost to consumption, eStart cashless transaction scheme will be introduced whereby RM150 will be deposited into e-wallets of youths aged between 18 and 20. And as for discretionary goods, the extension of SST exemption of auto sales (100% on CKD and 50% on CBU) besides incentives given for EV ownership should help to sustain healthy growth for the sector (see below for further details).

Imposition of a one-off “Cukai Makmur” – additional 9% tax imposed on chargeable income exceeding RM100m: As part of measures to help meet greater funding support for those impacted by the pandemic, a one-off tax of 24% will be imposed on corporates on the first RM100m taxable income and 33% in excess of that for the 2022 assessment year. As the taxable income in excess of RM100m will be subjected to an additional 9% tax rate (given the current statutory tax rate of 24%), the EPS of the FBMKLCI could be reduced by 9% from 108.0 sen to 98.1 sen by our estimates. We project that based only on the 30 KLCI component stocks, the government stands to gain an incremental RM5.8b additional tax income from this measure. Our earlier target for the KLCI of 1611 is hence reduced to 1601 or by less than 1% given that this is only a one-off impact. With this revision, the implied forward target PER is16.3x or about 1SD above the 10-year mean.

Costlier transaction costs for trading of listed securities may dampen high frequency trades: Currently, the stamp duty rate on contract notes is 0.1% subject to a ceiling of RM200, while a service tax of 6% is imposed on brokerage where for a typical retail trade is 0.5% of value traded (lower than 0.5% for larger institutional trades). Under the new measures, stamp duty is now raised to 0.15% with the ceiling and service tax removed. Essentially this measure will lead to higher transaction cost for trading. Where in the past, a large trade for a retail investor involves transaction cost of 0.53% (mainly brokerage plus service tax), it now increases to 0.65% (brokerage plus stamp duty) or approximately an increase of 0.12%. While the higher cost look like a market dampener, the impact may actually be limited considering the cost increase is small in percentage terms. In the context of a long-term institutional investor who i.e. typically looks for 10% return, an additional 0.12% cost to overcome may be tolerable but short-term traders would likely feel the pinch. It may deter high frequency brokerage paying traders but less so for long-term equity investors and should have no impact on investment account traders (IVT) and proprietary day traders (PDT). However, all considered, it could potentially be a negative for BURSA (OP; TP: RM8.20).

Adjustments to windfall levy thresholds for palm oil: The threshold for imposing palm oil windfall profit levy will be increased from RM2,500 to RM3,000 per tonne for Peninsula and from RM3,000 to RM3,500 for Sabah and Sarawak. The levies for both Peninsular and East Malaysia which were 3.0% and 1.5% respectively are now equalised to 3.0% for both. Essentially, this revision works to the benefit of Peninsular planters and negative to East Malaysia planters at the current CPO price. Within our planter universe, HSPLANT and TAANN’s estates are entirely in East Malaysia while IOICORP has 65% of its estates in Sabah. FGV which has 65% in the Peninsular and 34% in East Malaysia is a marginal beneficiary.

Mildly positive for auto sector, as 100% sales tax exemption on CKDs and 50% on CBUs for passenger cars, MPVs and SUVs extended another six months to 30th June 2022: This marks the third extension since the start of the pandemic. While the exemption so far has helped lift car sales, going forward, potential buyers may no longer rush to buy before year-end but defer purchases till 1H 2022 instead. And to encourage ownership of electric vehicles, individual tax relief of up to RM2,500 will be introduced for purchase, installation, leasing and subscription fees for EV charging facilities for year of assessment (YA) 2022 and YA 2023. Additionally, import duty, excise duty and sales tax exemption on EV sales will be extended until 30th June 2022.

Short term negative on selected F&B plays on excise duties on sugary premix drinks: Effective 1st April 2022, excise duty will be imposed on premix drinks with sugar content including chocolate, coffee and tea which could see some immediate impact of lower sales. Potentially, this may negatively impact PWROOT (UP; TP: RM1.15), NESTLE (MP; TP: RM143.60) and F&N (OP; TP: RM33.15). Excise duties are also imposed on liquids or gels containing nicotine in reference to e-cigarettes and vape. This is a continuation of the 10% excise duties that were imposed last year which could benefit tobacco players like BAT (OP; TP: RM16.70) that offer the traditional cigarette alternatives. We see CARLSBG (MP; TP: RM23.10) and HEIM (MP; TP: RM23.90) benefitting from the absence of excise duties increase.

Mild dampener to e-commerce consumption: With the exception of food and beverages, service tax will be imposed on delivery of goods including those involving e-commerce from 1st July 2022. Sale tax will be imposed on imported low value goods sold online and couriered to customers from 1st January 2022.

Relief for micro enterprises and SMEs; indirectly positive for banks with such exposures: In a relief to cashflow stress, a six-month deferment of income tax instalment payments will be allowed for micro enterprises and SMEs until 30th June 2022. Other incentives include extension of stamp duty exemptions for instruments related to M&A of micro enterprises and SMEs. Stamp duty exemptions for restructuring and rescheduling of business loans or refinancing agreements between borrowers and banks were also extended, until 31st December 2022.

Healthcare sector benefits from expanded healthcare spending and expanded tax relief: The Ministry of Health is the second largest recipient of funding at RM32.4b after the Ministry of Education. Among others, another RM2b was allocated for vaccine procurement to fund booster shots and vaccination of children and RM2b for expanding the public health service needs including purchase of PPE, reagent and consumables. The Ministry will continue to outsource services to private hospitals to compliment hospitals under the Ministry to optimise the public health capacity that benefits the likes of KPJ (MP; TP: RM1.03), IHH (OP; TP: RM6.65), SUNWAY (MP; TP: RM1.90) and PHARMA (UP; TP: RM0.54)

Benefits for the Digital Economy: Under the Digital Ecosystem Acceleration Scheme, an income tax rate in the range of 0% to 10% is applicable for up to 10 years for new companies which are digital technology providers or 10% for up to 10 years for existing companies. For digital infrastructure providers, investment tax allowance of up to 100% on qualifying capital expenditure for up to 10 years is allowed whereby applications must be received by MIDA between 30th October 2021 and 31st December 2025. We see potential beneficiaries here to include GHLSYS (OP; TP: RM2.30), REVENUE (NR) as installers of digital payment ecosystem, and MYEG (NR). Additionally, tax relief for purchase of mobile phones, computers and tablets of RM2,500 will be extended to YA 2022. RM450m is allocated to an estimated 600,000 undergraduates from the B40 group to get a tablet each.

No Real Property Gains Tax for disposals by individuals from the sixth year onwards but we see limited impact of this encouraging property transactions booster: Under the present structure, RPGT for disposals from 6th year onwards is charged a rate of 5%, while for up to the 3rd year it is 30% and 20% for 4th and 15% for the 5th year. Exemption taking effect only from year 6 onwards while maintaining the RPGT rates for years 1 to 5 may not be attractive enough to entice property investors in our view.

Source: Kenanga Research - 1 Nov 2021