The Malaysian Government announced the country’s budget for 2016 last Friday. The budget delivered by Prime Minister Najib Razak targets at helping low income families, bolstering growth as well as promoting stronger public fiscal balance. Following this, Macquarie Equities Research (MER) released a research report on Monday morning, expressing their view on the budget initiatives.

Read below excerpts from the report:

Event

• Malaysia’s Budget for 2016 surprised MER slightly, by not being as contractionary as MER expected – with the fiscal deficit expected to decline to only 3.1% of GDP in 2016 (from 3.2% projected for this year). However, MER believes the government is being exceptionally cautious in its estimates for economic growth next year (4-5%, versus MER’s forecast of 6.1% real GDP growth, and MER’s 5.5-6%, which is consistent with the 5.7% average growth of the last 5.5 years). With the GST providing RM21bn of extra revenue in 2016 (offsetting the RM10.6bn reduction in Investment Income, mainly from a decline in Petronas’ dividends), and a rise in income tax rates for the highest earners, MER expects the fiscal deficit to decline to 2.8% of GDP in 2016.

• The 2016 Budget provides for net development spending to rise 6.1% YoY, but focuses more on boosting private investment – through an extended Reinvestment Allowance and a series of catalytic projects aimed at high-tech manufacturing and services, tourism and aviation (MRO), petrochemicals, and resource-processing. The focus on boosting Technical and Vocational Education and Training (TVET) should bolster medium-term productivity. But the new revenue (from GST and higher marginal income tax rates) is to be deployed partly on income support for the bottom 40% of income earners, augmenting the supply of affordable housing and a rise in the minimum wage to RM1000 (from RM900). The resulting boost to domestic demand should help complement the export-led recovery to 6.1% real GDP growth in 2016.

Sectoral Impact

• For the first time since 2012, there was no hike in the excise duty on “sin” products (tobacco, alcohol, gaming). MER notes that in 2012, industry volume grew 5.8% YoY; MER cannot rule out a tax hike later in the year, but for now BAT remains one of MER’s top picks for its 5.1% dividend yield. And Genting Malaysia is one of MER’s top picks in Asia’s gaming sector.

• The announcement of an investment of RM18bn in the RAPID petrochemical complex (in which a US$27bn multi-year commitment was made 18 months ago) does not alter MER’s cautious view of the Oil & Gas sector. The strong emphasis on affordable housing is in line with MER’s expectations, and should bolster interest in Mah Sing and SP Setia. MER views the Budget as neutral to slightly positive for the Financial sector, and is Outperform on Bursa Malaysia, Public Bank, Hong Leong Bank and Alliance Financial Group.

• MER views the Budget initiatives on Telecom as neutral to slightly positive – with RM1.2bn being spent on boosting broadband speeds in rural areas, and a GST rebate on pre-paid mobile services. Telekom Malaysia remains MER’s top pick in the sector because of its strength in the data business. The Budget initiatives on tourism should be mildly beneficial to Air Asia, which MER likes primarily because it is trading more than 1sd below its historic EV/EBITDAR.

Outlook

• MER remains constructive on Malaysian equities, with the market at 14x earnings – about 0.5sd below its 15-year mean valuation of 15.5x. The fiscal improvement removes one source of downward pressure on ROEs – the transfer of fiscal burdens by the government to the private sector.

Source: Macquarie Research - 27 Oct 2015