2013-10-28 [ ][ ] 2014 Budget Neutral-to-Slight Positive

source：i3investor

2014 Budget Neutral-to-Slight Positive

Author: kiasutrader   |   Publish date: Mon, 28 Oct 10:22 

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The 2014 Budget announcements are mostly within our expectations. While the impacts on the various sectors are mixed, we believe generally it should have a Neutral-to-Positive impact to the local equity market. However, a correction from here is still likely as the discount between FBMKLCI to its consensus Index Target of 1,860 is currently narrowed to <3% (see Figure 1) and the Forward PER of FBMKLCI is now traded >17x (see Figure 2). These scenarios could suggest a temporary peak for FBMKLCI in the absence of Index Target and earnings estimates upgrades. However, as the 4th and 1st quarters are seasonally stronger, the market should remain supportive (see Figure 3). Hence, our Buying-on-Weakness (“B.O.W.”) Strategy. Our 12-month Index Target remains at 1,855 backed by 9.7% earnings growth in FY14 which implies a FY14 PER of 17.25x. As we have anticipated some of the Budget measures, our Top 10 Stock Picks remain mostly unchanged except that we have replaced UEMS (OP; TP: RM3.05) with IJMLAND (OP, TP: RM3.60). To recap, we have picked AIRASIA (OP; TP: RM3.51), CBIP (OP; TP: RM3.18), KOSSAN (OP; TP: RM7.86), GAMUDA (OP; TP: RM5.30), RHBCAP (OP; TP: RM8.35), SKPETRO (OP; TP: RM4.72), TENAGA (OP; TP: RM10.48), TM (OP; TP: RM5.94), and ZHULIAN (OP; TP: RM4.60 under reviewed) as our 4Q13 Top Picks. We also like ASIABRN (OP, TP: RM3.95), BURSA (OP, TP: RM8.50), CENSOF (OP, TP: RM0.61) COASTAL (OP; TP: RM3.87), MUHIBAH (OP; TP: RM3.00), REDTONE (OP, TP: RM0.81) and SCIENTX (OP, TP: RM6.28).

Budget Thrusts. Prime Minister announced the 2014 Budget last Friday (25/10/13). We understand that the 2014 Budget is formulated to ensure the economy continues to expand at a strong pace, and to reduce the fiscal deficit, with the overall objective of prospering the nation and promoting the well-being of the rakyat. Towards this, the 2014 Budget is formulated based on the theme “Strengthening Economic Resilience, Accelerating Transformation And Fulfilling Promises”, outlining 5 main thrusts, which are (i) Invigorating Economic Activity, (ii) Strengthening Fiscal Management, (iii) Inculcating Excellence in Human Capital, (iv) Intensifying Urban and Rural Development, and (v) Ensuring Well-Being of the Rakyat.

Impact on Market: Neutral-to-Positive. We believe the announcement of (i) GST Implementation (on 1 April 2015 @ 6%) and (ii) Corporate Tax Cut (by 1% in 2016) could be positive to the local equity market. Recall that in our 4Q13 Investment Strategy, we highlighted that GST implementation could be imminent as this is an efficient and structurally effective way to broaden the nation’s tax revenue and hence improving the country’s fiscal position as well as to prevent further deterioration in our sovereign rating. With the firm date and rate announcements we reckon that Ringgit could strengthen (Figure 4) and hence we are expecting more foreign inflow into both equity (Figure 5 & 6) and debt markets. Besides, market could stage a rally before the actual date of GST implementation, judging from the Australian and Singaporean experience (see Figure 7-9). While newsflow on corporate tax cut could potentially spur market sentiment, we only cautiously optimistic as the tax cut will only be implemented in 2016.  Theoretically, a 1% reduction in corporate tax could boost FBMKLCI by approximately 20 index points.

Impacts To Various Sectors (see Figure 10). Judging from the announcement, we believe its impacts to most of the sectors are generally Neutral. However, we do see some sectors with positive tone. These sectors are (i) Building Materials & Constructions, (ii) Education, (iii) Logistic & Transportations including Aviation, (iv) MLM, and (v) Telco especially TM. As there is no hike in taxes for the Brewery Sector, we also deem this to be a positive for the sector. Besides, we also see a clear-cut winner – CENSOF – with the implementation of GST as it is one of the major accounting solutions providers for government agencies. With the implementation of GST, CENSOF can anticipate to see more contract flows. Besides, it may also benefit from the government intention to promote Outcome-Based Budgeting (OBB) in the Ministry of International Trade and Industry and Ministry of Health Ministry, in particular. Thus far, CENSOF is handling a similar project for Ministry of Finance worth RM25.47m, which is the 2nd largest contract for CENSOF after PERKESO. TENAGA, on the other hand, is another clear-cut winner for subsidy rationalisation program. Nonetheless, industry players in (i) Banks & Non-Bank Money Lenders, (ii) Consumer, (iii) MREIT and (iv) Property Developers might face tougher operating environment.

Source: Kenanga