Macquarie Equities Research (MQ Research) released a report with further details on the implications of Budget 2022. MQ Research is of the view that domestic clients are willing to look past the one-off Cukai Makmur / prosperity tax impact to fundamentals but see stamp-duty as more problematic, while there is a little more downside risk from further foreign selling as the implications of Budget 2022 are still being digested. MQ Research thinks that banks risk more foreign selling and reiterates preference for exporters/tech/thematics.

Budget 2022 post-mortem: One-off or overhang?

• It is clear the market overwhelmingly views Budget 2022’s tax measures as negative. The key question now, is how will the market price in the impact? It appears that the post-budget correction in valuations is correlating well with MQ Research’s sector-by-sector estimates for the one-off tax impact. Furthermore, current valuations ascribe roughly half of the -6.5% FY22E net profit (NP) impact, landing somewhere between MQ Research’s base case and best case assumptions:
  • Base case: A -6.5% hit to earnings results in a -6.5% hit to market valuations, assuming market multiple remains unchanged.
  • Best case: Intrinsic value destroyed equals gross incremental tax of RM6bn; implies -0.4% downside vs RM1.4tn market cap.
  • Worst case: Market multiple contracts; driving >6.5% downside.

Banks Risk More Foreign Selling

• Feedback from domestic clients suggests a majority of funds may be willing to look past the one-off tax, being far more preoccupied with the impact of the stamp duty increase/cap removal. Bulk of domestic institutional selling appears concentrated at the start of the week, and tapering off after. Based on feedback, MQ Research thinks domestic funds will exercise restraint from further selling, especially with valuations correcting ~half-way to MQ Research’s base case.
• Foreign flows have been slower to react to the news, and MQ Research thinks that selling may accelerate going forward. Feedback from foreign clients suggests most are still digesting the news. And in stark contrast to domestics, they were more concerned about the one-off tax (stamp duty stings less due to lower churn), primarily from the perceived increase in policy risk going forward. Notably, the tax disproportionately hurts banks, which has been a sector to benefit from the recent foreign buying interest. In turn, it faces the most downside short term (ST).

Elections Needed to Ease Policy Overhang

• Policy risk remains elevated. The “Prosperity Tax” was simply a quick fix for 2022, which could be implemented on short notice. But what about 2023? This paves the way for other taxes (e.g. capital gains taxes, windfall taxes) that simply are not practical to implement quickly (too complex) or too sensitive (e.g. GST) ahead of a possible 2H22 election. MQ Research sees rising food inflation risks (not well addressed in Budget), coupled with 2Q22 peak in reopening demand surge as key catalysts for more policy risk in 2022. MQ Research reiterates its preference for exporters/tech/thematic to avoid policy risks. See banks and exporters/tech/thematic companies under MQ Research’s coverage below.

Source: Macquarie Research - 9 Nov 2021