On Tuesday, Prime Minister Najib Razak revised the fiscal deficit target higher and lowered the 2015 economic growth forecast due to the recent plunge in oil prices. Following the announcements, the Malaysian ringgit fell as much as 1.0% to close at 3.6075, its lowest level since April 2009. However, the FBM KLCI remained relatively unchanged, shaving only 3.2 points or 0.2%.
 
Macquarie Equities Research (MER) released an interesting research report right after the budget announcement. Excerpts from the report follow:

Event

• PM Najib Razak announced the revised Budget 2015 in light of the falling oil price, increasing the budget deficit for 2015 to 3.2% of GDP, from 3.0%. Using USD55 per barrel for Brent oil price, government revenue will be lower by RM13.8B from the earlier Budget 2015. The overall impact, with reduced operating expenditure, is a higher budget deficit of RM37.0B (+RM1.3B).

• MER is positive on the overall sensible measures taken and reinforce the importance of implementing GST to compensate for lower oil-related revenue, cutback on RM5.5B of operating expenditure, and maintain the same development expenditure of RM48.5B.

Impact

• Limited risk of sovereign rating downgrade. MER believes the revised Budget 2015 is realistic and should not result in a sovereign risk rating downgrade. Taking USD55 per barrel for crude oil compared to USD100 per barrel, the estimated oil-related revenue to the government declines by RM13.8B to RM47.2B, from RM61.0B in the original Budget 2015.

• Postponing electricity tariff hike in 2015 is actually positive for Tenaga Nasional (TNB MK, RM14.50, Outperform, TP: RM18.40): with lower LNG prices, absence of adjustment to electricity tariffs and regulated gas prices would translate to supernormal profits for Tenaga. Delaying the scheduled gas price hike for industrial sector benefits Top Glove (TOPG MK, RM4.78, Outperform, TP: RM 5.15).

• Construction sector to benefit most. The development budget of RM48.5B for 2015 is maintained. MRT Line 2, LRT 3 and High-Speed Rail will continue as planned and Gamuda (GAM MK, RM5.02, Outperform, TP: RM5.59 ) is project-managing MRT Line 2.

• Flood-related spending on damaged infrastructure of RM2.9B is an added boost to construction sector, with a positive multiplier effect on the economy. However, MER believes the repair work will be broken up into several smaller contracts to enable many smaller contractors to participate.

• GDP forecast lower at 4.5% to 5.0% from 5.0% to 6.0%. MER had forecasted 2015 GDP of 4.87% and are retaining its forecast.

• Government expects to collect an additional RM1B GST revenue as the number of registered license holders, 304,000, has exceeded earlier expectations. This is positive for My E.G. Services Bhd (MYEG MK, RM2.48, Outperform, TP: RM 5.00) as it is undertaking the GST monitoring module (given the potential larger monitoring base).

 
Outlook
There is no change to MER’s annual strategy investment themes of 1) beneficiaries of economic reforms; 2) beneficiaries of low Ringgit/low crude oil price; and 3) defensive companies. The companies that MER believes benefit most from the steps taken in the revised budget 2015 are Tenaga, Gamuda, Top Glove and MYEG.
 
Investment opportunities
Investors expecting further weakness in the local index following the budget revision can consider the put warrants listed over the FBM KLCI. Index put warrants are one of the few investment tools available, which allow you to benefit from a bearish view on the local market. Their value increases as the index decreases.

Source: Macquarie Research - 21 Jan 2015