Prime Minister (PM) Datuk Seri Najib Tun Razak tabled Budget 2018 in parliament last Friday. A total deficit of RM280.25 bil has been allocated, an increase of 7.5% from the 2017 budget allocation. Macquarie Equities Research (MQ Research) wrote a report, providing further analysis along with their top stock picks.

Event

• With Budget 2018 being the last before the next general elections (i.e. GE14, which has to be held by Aug 2018), income supports were generous but also more targeted, with focus on keeping key government support bases onside (civil service, FELDA settlers) whilst also reaching out to potentially undecided middle class and minority voters via tax cuts and education/business supports. Encouraging forward-looking elements included incentives for venture capital investing, green technology development and automation.
• Direct equity market repercussions are minimal but sentiment should be lifted by the government’s sustained commitment to fiscal integrity, which in turn implies a necessary acceleration of debt-neutral Government-Linked Companies (GLC) reforms post-GE14. MQ Research’s top GLC picks are Tenaga, Sime Darby and POS Malaysia.

Impact

• Macro: Per revenue and operating expenditure (opex) details, the government expects further decline in the budget deficit, from an in-line 3.0% in 2017, to 2.8% in 2018 - matching faster growth in operating expenditure is a forecast pick-up in broad tax revenues, including oil-related (budgeted price is USD52/bbl for 2018, from USD45/bbl this year). Strong gross domestic product (GDP) growth means government debt/GDP is expected to decline to 50.9% in 2017, from 52.7% in 2016, despite 5% year-on-year (YoY) increase in total debt. Estimated 16.6% export growth in 2017 underpins a current account surplus of 2.5%, forecast to narrow only modestly in 2018 (to 2.3%) on sustained albeit low single-digit trade growth.
• Key micro measures: The largest giveaways were to i) the 1.6mn (11% of the workforce) civil service where there was a tripling in one-off special payment vs. 2017 i.e. from RM500 to RM1,500 (this will cost c.RM2.4bn); retirees were not left out, with their special payment rising from RM500 to RM750 (retirement charges are c.10% of opex); ii) for the private sector, the tax rate for those in the income tax band between RM20,000 and RM70,000 was cut 2ppts (cost: c.RM1.5bn); and iii) BR1M cash assistance was unchanged YoY i.e. maximum of RM1,200 for low-income households (cost: c.RM6.8bn). The lack of BR1M allocation increase may reflect both the fact that another hike in the minimum wage is expected before GE14 as well as the need to spread spending to reach a broader swathe of the population.
• Strategy, Tenaga in focus: the government’s increased focus on the hard-pressed M40 middle class via the tax cut and other measures (e.g. easing cost of maids, halting tolling) should pay dividends in GE14 and also suggests re top pick Tenaga that electricity tariff adjustments for higher fuel costs will be passed on when next reviewed in December – 50% of households (<200kWh) already have their electricity bills paid for by the government.

Outlook

• MQ Research’s actionable ideas are focused on
  • banks, for broadly improved earnings drivers, with rising oil price to cap oil & gas-led non-performing loans (NPL) concerns and higher rates to support net interest margin (NIM) recovery; MQ Research likes CIMB, RHB;
  • construction, where Gamuda is the big-cap pick but mid-caps like Econpile are most EPS-sensitive to order book wins ; and
  • GLC Reform, where Sime Darby’s new management line-up is set to execute on the conglomerates break-up; MQ Research also likes Tenaga (valuations, dividend boost) and POS (M) (credible e-commerce execution).

Source: Macquarie Research - 30 Oct 2017