Following the Malaysian Budget 2022 that was tabled by the Finance Minister, Tengku Zafrul last Friday, Macquarie Equities Research (MQ Research) thinks that the corporate tax rate (also known as “Cukai Makmur” or “Prosperous Tax”) of 33% may reduce companies FY22 earnings by 6%. Meanwhile, the RM12.2bn handouts that are allocated for Bantuan Keluarga Malaysia and welfare assistance, among others, should be positive for consumer spending as it may help to boost the economy for reopening momentum. Read an excerpt of MQ Research’s report dated 1 November to find out MQ Research’s views and expectations on key potential beneficiaries as well as overall markets.

Banks, telcos, energy face the biggest risk to FY22 earnings

• MQ Research’s anticipation of the government’s populist leanings was borne out by the announcement of the one-off “Cukai Makmur” or Prosperous Tax. MQ Research estimates a 6% hit to corporate earnings, based on a comprehensive screen of the top 100 companies (those expected to be profitable in FY22). The one-off tax will raise corporate taxes to 33% for income over RM100m for FY22. The design of the tax disproportionately hurts larger corporates that have a high proportion of domestic revenues. MQ Research estimates financials (-9%) and telcos (-8%) will be the hardest hit, with technology and healthcare being the least impacted.

Sector Takeaways:

• Consumer: Total handouts of RM12.2bn: 1) Bantuan Keluarga Malaysia (BKM): RM8.2bn (+26% y/y), 2) e-start: RM300m, 3) welfare assistance: RM2.4bn, 4) special financing to civil servants: RM1.3bn.

• Banks: Will get some returns on the higher taxes; stimulus measure for households/businesses will ease asset quality stress, especially the ~600k jobs to be created. Mandate for Khazanah to manage RM3bn rehabilitation fund for Covid-hit corporates will aid with exposures in aviation, tourism etc.

• Vape/Sugar tax: Excise duties to be introduced for liquid/gel products containing nicotine, which are currently banned. Suggests legalisation may be around the corner. The sugar tax has been widened to encompass a wider product range, but MQ Research expects minimal impact to fast moving consumer goods (FMCG) prices.

• Plantations. Windfall profit levy threshold has been raised to RM3,000/3,500mt from RM2,500/RM3,000mt previously in Peninsular/ East Malaysia. Levy rates for East Malaysia have been adjusted up from 1.5% to 3%. Mildly negative, with minimal (>2%) impact to bottom line.

• Construction unexciting: General allocation for construction is down 2% year-on-year (y-o-y). No mention of KVMRT3 at all. Pan Borneo Highway Sabah will benefit from federal’s funds, but that is nothing new. In-line with low expectations.

• Environmental, Social and Governance (ESG) developments: Voluntary Carbon Market will facilitate carbon credit trading (under Bursa Malaysia). Bank Negara Malaysia will introduce a RM1bn Low Carbon Transition Facility to help small-to-medium sized enterprises adopt ESG practices. Electric vehicles tax exemptions will spur adoption and catalyse charging infrastructure development.

Bleak short-term outlook but excessive selling could be an opportunity

• MQ Research expects a strong negative reaction from markets as the impact of the one-off corporate tax hike is digested, likely amplified by foreign selling.
• Excessive corrections could present buying opportunities, especially if sell-off exceeds MQ Research’s tax-impact estimates.

Source: Macquarie Research - 1 Nov 2021