Budget 2013- Clearly An Election Budget

We are of the view that Budget 2013 will have a mildly positive impact on Malaysia’s equity market. Much like Budget 2012, there are goodies aplenty for the “Rakyat”, especially those in the lower income group. This is not unexpected with the upcoming General Election. Although the quantum of goodies for the individual is rather small, they should collectively create momentum for consumption. The clear winners are the Education, Brewery & Tobacco and consumer sectors including telcos. In contrast, the increase in RPGT for disposal for holding under 5 years is a bane for the Property sector.

Mildly positive. While we see the Budget 2013 as being only mildly positive on the equity market as a whole, there are some clear winners. The education sector received a notable allocation while for the brewery and tobacco sectors, no news was indeed good news as the sin sector was spared an excise duty hike. The construction sector should benefit from the allocation to build water and road infrastructure in the rural areas as well as affordable housing but such projects will mainly benefit the smaller construction players.

Stronger growth next year. The Government expects stronger economic growth of 4.5%-5.5% for 2013 compared with 4.5% - 5.0% for 2012. This is commendable, considering Indonesia’s 6.2% and Thailand’s 5.5% growth. More importantly, the Government has to strike a balance between achieving economic growth while at the same time cutting its budget deficit to 4.0% from 4.5% in 2012. We believe, however, that fiscal reforms will need to be expedited in order to pare down the country’s budget deficit. At the very least, the Government seems to be addressing growing concerns over this deficit. Note that the deficit for Budget 2013 will be the smallest in five years, which should be welcome news.

Dishing out the goodies. The notable handouts are a 1% cut in income tax, which will give rise to tax savings of up toRM475, a RM250 cash handout under BR1M, a RM100/month raise for pensioners, and special incentives for military personnel worth RM200/month. Collectively, these should boost Malaysians’ disposable incomes, which will in turn spur consumption although it might not be sufficient enough to prop up purchases of big-ticket items.

Potential beneficiaries. Budget 2013’s beneficiaries are education stocks such as SEGi and Prestariang due to Government’s unwavering focus on this sector and the consumer sin stocks such as Guinness, Carlsberg, JTI and BAT, which have been spared a highly-anticipated excise duty hike and which may enjoy the spillover effects from the cash handouts to the Rakyat. Meanwhile, construction stocks HSL may benefit from rural infrastructure works while KimLun’s IBS expertise will put the company in a strong position to capitalize on related projects.

Notable Budget Beneficiaries

THE ECONOMICS POINT OF VIEW

The 2013 Budget attempts to be bold, tackling issues that we thought would have been left till after the general election. Some of these issues included cutting income taxes, reducing subsidies and an ambitious plan to keep the budget deficit below 3.0% by 2015. However, the budget did avoid the hard issues that were not only “voter unfriendly” but required immediate attention, such as the Goods & Services Tax (GST) and fuel subsidy cuts. Nevertheless, it did attempt to be inclusive, offering something for everyone while being fiscally-responsible.

For 2013, the Government is projecting for the economy to grow by 4.5-5.5% on the back of an improving global backdrop. This estimate is stronger than the 4.5-5.0% that it forecasts for 2012, and is broadly in line with our own projection for 4.9% growth. Domestic demand will continue to driving growth in 2013, underpinned by the supportive measures announced in Budget 2013. Much of this demand would be private-sector led, as reflected in the robust growth of private investment expenditure of 13.3% projected for 2013 (vs. 11.7% in 2012).

As we expected, the Government continued to distribute “goodies” to the people, especially low-income households, allowing them to share in the fruits of economic growth and to defray the rising cost of living. The Government handed out another RM500 in cash to low-income households as well as provided assistance to students, on top of declaring a one-and-a-half month’s bonus to civil servants - all effective from January 2013. Besides announcing a RM1.9bn plan to build more affordable houses in the urban areas to address the concerns of urban dwellers, the Government also increased the real property gains tax (RPGT) to discourage speculation in the property market. It is raising the RPGT to 15% from 10% for property disposed within two years of purchase, and to 10% from 5% for those disposed of within three to five years. These measures should ease growing concerns among urban dwellers over the affordability of housing in major towns around the country. Against market expectations, the Government reduced the personal income tax rate by 1-ppt for income earners with taxable incomes of RM2,500-RM50,000. We were expecting income tax reforms to accompany the introduction of the GST, but the Government may have instead decided to appease the Rakyat ahead of such a move. Moreover, such a move would also solidify its support among those who benefited from such a tax cut.

However, what Budget 2013 did not address was the issue of subsidy rationalization. It did reduce the sugar subsidy by RM0.20 per kg to RM0.34 per kg effective 29 Sep 2012, which helped to lower its subsidy cost by 11.3% to RM37.6bn for 2013. However, against the original budget allocation in 2012, this represents a 14% increase in subsidies. Such a move suggests that the Government has still got some way to go before removing subsidies from the system. Moreover, the 2013 subsidy allocation is premised on the assumption of oil prices moderating. However, if this does not pan out, the Government could be facing the prospect of a heftier bill next year.

The outlay planned in Budget 2013 is only 1.1% lower than that for 2012, but despite a modest 0.7%, increase in planned revenue, the target deficit is 4.0% of GDP for 2013 (vs an estimate of 4.5% in 2012). While the lower projected deficit fits into the Government’s prudent approach to eventually narrow the deficit to 3.0% in 2015, we suspect that this could prove challenging to achieve without an accompanying acceleration in fiscal reforms. Key among these reforms is the introduction of the GST to broaden the tax base and reduce the country’s reliance on petroleum revenue, which still accounts for about 30% of total revenue, as well as wean Malaysians off subsidies, particularly for fuel, in order to further reduce expenditure. While the budget did not seem to set out such action plans, we still hope that the Government would take bolder steps along this direction once the polls are out of the way.

WINNING THE RAKYAT’S HEARTS

• 1 percentage point reduction in income tax by for those in the chargeable income band from RM2,501 – RM50,000. This will give rise to a maximum saving of RM475 for each individual.
• A Bantuan Rakyat 1Malaysia 2.0 handout of RM250 for heads of households with monthly incomes under RM3k and single unmarried individuals with income no more than RM2k.
• Bonus to civil servants amounting to 1 ½ months’ salary, of which ½ month was paid over the recent Hari Raya
• Pensioners who have served for at least 25 years to get a RM720 to RM820 raise in pension.
• Special incentive of RM200 per month to all military personnel effective 1 Jan 2013 and revised service allowance from RM4.00 per hour to RM6.00 per hour for ordinary members and from RM5.80 to RM7.80 for officers.
• A RM1,000 one-off payment for former members of the armed forces who opted for early retirement, and who have served less than 21 years and did not receive any pension.
• Allocation of RM591m to reduce crime rate via an increase in PDRM personnel, upgrading of infrastructure and equipment and establishment of Motorcycle Patrolling Unit, CCTV implementation and increase in Police Volunteer Reserve.
• Allocation of RM4.5bn for rural infrastructure development projects including roads, water supply and economic development programmes.
• Increasing the number of 1Malaysia clinics by 70 new clinics. 1Malaysia clinics will now provide blood test services.
• Akhir Zaman Miskin programme to provide opportunities for low-income group.
• Building of 123,000 affordable housing units with various price ranges, the cheapest being 20,454 units which will be constructed using IBS and sold at between RM30k – RM40k.
• A 50% stamp duty exemption for the first property purchase with a price limit of RM400k.
  
  

SECTORS THAT WILL BENEFIT FROM BUDGET 2013

EDUCATION

• RM38.7bn will be allocated to the Ministry of Education for operating and development expenditure, and a further RM500m handed out to enhance teaching skills in core subjects through the Higher Order Thinking Skills approach.
• RM3.7bn will be allocated to train students in the technical and vocational fields.
• RM1.2bn will be allocated for pre-school education; in addition, RM380m will be set aside for the placement of kindergarten teachers
• A discount of 20% is to be given for the full repayment of PTPTN loans within a year, effective from 1 Oct 2012 until 30 Sept 2013. A 10% discount p.a. will be given for those that have been paying consistently from 1 Oct 2012.
• The existing tax relief on children’s higher education amounting to RM4,000 per person will be increased to RM6,000.
• Felda will spend RM100m a year for education and skill-training programmes as well as scholarships for children.
• RM200m will be allocated to establish the Graduate Employability Blueprint. Training programs in selected industries will be established to accommodate some 5,000 professionals in industries that include O&G, shipping, ICT, creative and biotechnology.

A plus for all. The Government’s RM38.7bn allocation for the Ministry of Education for 2013 is down by a sizeable dip of 23% from 2012’s RM50.2bn. That said, the new measures proposed in this budget are better defined, with targeted approaches in place to address the shortcomings in the country’s education system that were highlighted in the recently-released National Education Blueprint. These measures cover pre-school education to post-school training for school leavers as well as, to an extent, the retraining of existing teaching staff.

Spotlight on PTPTN issues. Among the measures that stand out are the discounts offered to existing PTPTN borrowers to encourage timely repayments. The Government has again highlighted that PTPTN, which has an outstanding balance of close to RM30bn, would not be abolished as it is now a source of funding for some 80% and 55% of students in public varsities and private institutions respectively. We believe this proposal, coupled with the appointment of the Inland Revenue Board as the collection agent, would ensure the sustainability of the public funding system, which should benefit all tertiary education providers in the country.

What’s in it for HELP and SEGi. The Government will embark on further training of existing teachers as well as students to better equip them with professional knowledge. Of note, RM3.7bn will be spent to train students in the technical and vocational fields. We believe this could potentially benefit HELP International (NEUTRAL; FV: RM1.93), which recently established its vocational and technical programmes with the completion of its Fraser Business Park campus. The group also recently went into a joint venture with the Naza Group to set up a college for automotive and transport management. Meanwhile, the Government has also allocated RM1.6bn for the improvement of the existing pre-school education. We believe this could potentially benefit SEGi (BUY; FV: RM2.52), which is already championing an Economic Transformation Program initiative to train teachers involved in early childcare education.

Potential role for Prestariang, too. On top of this, we believe Prestariang (BUY; FV: RM2.15) could also capitalise on the various training initiatives proposed. Given the group’s existing partnerships with technology partners such as Microsoft, IBM, Autodesk, and Prometric, it could potentially bag some contracts to train existing teachers by providing English programmes (for example), as well as ICT courses for existing students.

Maintain OVERWEIGHT. Overall, the measures announced provide some assurance of the Government’s commitment to improve Malaysia’s education system. While the quantum of allocation to the Education Ministry being in lower y-o-y, we are glad to see a more direct and targeted approach, which may better define the measures proposed to address the weaknesses in present system. All in all, we continue to see the long-term potential for the sector and hence, maintain OVERWEIGHT.

CONSTRUCTION

• RM49.7bn allocated for development expenditure.
• A focus on O&G projects including the PETRONAS Refinery and Petrochemical Integrated Development (RAPID) as well as the RM26bn Tun Razak Exchange (TRX).
• RM4.5bn will be allocated to implement various rural infrastructure development projects including roads, utility and water.
• RM1.9bn allocated to build 123,000 affordable housing units.
• RM543m will be provided to Jabatan Perumahan Negara to implement 45 projects under the Rakyat Housing Program (PPR) which involves the construction of 20,454 units through the Industrialized Building System (IBS).
• To allocate RM100m to the Ministry of Housing and Local Government to revive 30 abandoned housing projects.
• Felda will implement and complete new housing projects comprising 20,000 units at RM1.5bn.

Slight cut in development expenditure. The 2013 allocation for development expenditure of RM49.7bn is down marginally by 2.9% as the Government tightened its belt to cut its budget deficit target from 4.5% to 4.0%. While this may appear negative at first glance, we do find some positives as the Government is sharpening its focus in rolling out the much-anticipated RAPID Pengerang project as well as the TRX.

Lacking in details. Unlike previous years when specific projects were singled out during the PM’s budget speech, no names were mentioned this time around other than the RAPID Pengerang and TRX projects. We believe focus will likely be on accelerating the implementation of the two mega-billion projects in 2013, with the former expecting to get some RM120bn in investments over the next five years while the latter is reported to cost as much as RM26bn in development costs. We understand that some of the bigger construction players like IJM (TRADING BUY; FV: RM6.32), WCT (BUY; FV: RM3.36) and Mudajaya (NEUTRAL; FV: RM2.88) are eyeing the civil works jobs for these for projects, of which foundation and earth works are expected to cost over RM1bn each. Although no highways were mentioned, we continue to expect to hear more on the proposed RM7bn West Coast Expressway (WCE) post-election while on the other hand, there could be some new developments on the remaining two lines of KV MRT come 1H2013.

More attention on small-scale projects. Having said that, the budget highlighted many smaller-scale projects, including the RM4.5bn allocation on rural infrastructure, RM1.9bn for affordable housing and a RM1.2bn allocation for Felda’s new housing projects. Of these, we see potential in Sarawak-based HSL (BUY, FV: RM2.22) and KimLun (BUY, FV: RM2.48) given the former’s marine expertise and the latter’s strength in the IBS segment. Generally, we are largely neutral on the proposed measures for this sector as concrete and affirmative information is lacking. That said, we are maintaining our OVERWEIGHT stance on the sector for now, as we see opportunities for a potential hike in contract flows post-general election, with projects such as the Gemas-Johor Bahru double tracking, WCE and KV MRT projects expected to hog the limelight.

BREWERIES & TOBACCO

• No hike in excise duties for beer.
• No hike in excise duties for tobacco.

We were right on breweries. As expected, there will be no beer duty hike this year, making it the seventh consecutive year of reprieve for the sector. Malaysia continues to have the second-highest beer taxes in the world and the highest beer taxes on a disposable income-adjusted basis (drinkers pay RM7.40 for every litre of beer). With affordable beer an incentive for foreign non-Muslim tourist arrivals, the Government’s agenda to boost the tourism sector is another reason it is keeping duty rates where they are. We like GAB (FV: RM17.47) the most for its: (i) diversified brand portfolio with exposure across the entire spectrum (from value to premium segment), and (ii) stronghold in the resilient off-trade (supermarkets, convenience stores) and traditional on-trade channels (restaurants, coffee shops).

Spot-on for tobacco too. There will also be no hike in tobacco duty for the second year in a row, especially after eight consecutive years of prior increases. This is within expectations as: (i) the Government is aiming for an election-friendly budget, and (ii) while coming off slightly, the proportion of illicit cigarettes remains worryingly high at 34.7% of total cigarettes consumed. With the Government also proposing a slew of cash handouts to the lower income population and civil servants, legitimate volumes may get a lift should some smokers trade up from illicit cigarettes to legal ones.

Breweries OVERWEIGHT, Tobacco NEUTRAL. Breweries remain our favourite sin sector, as its healthy volume growth and improving product mix (more premium beers) are fuelling profits. We continue to be cautious on Tobacco despite the absence of a duty hike this year. Although 1H12 tobacco volumes rose by 3.9% y-o-y, much of the growth comes after an especially weak 1Q11 plagued by cigarettes sold below the minimum retail price. With 2Q12 volumes growing by a meagre 0.4%, a continuation of tobacco duty hikes in Budget 2014 will likely push the legal volumes back into negative territory. Regulatory risks abound for the sector at a time when the Government looks to reduce the prevalence of smoking among the population.

CONSUMER

• RM230m as an incentive for fish landing and living allowance for fishermen.
• Assistance of RM500 for households earnings less than RM3,000, as well as RM250 for single unmarried individuals aged 21 years and above with earnings less than RM2,000 per month under BR1M
• A personal tax deduction of 1% for grouped annual income tax exceeding RM2,500 and RM50,000.
• Special incentives for military personnel, revising services allowance for military reserve forces, a one-off RM1,000 assistance for former armed forces.
• A one-and-a-half month bonus for civil servants and a higher pension for pensioners.
• Sugar subsidies are cut by RM0.20 per kg, with a corresponding hike in the sugar retail price ceiling to RM2.50 per kg.

Fishermen have good reason to smile. A total of RM230m will be allocated for the fisheries sector including fish landing incentives and living allowances for fishermen, which are set to boost fish landing volume and supply in Malaysia. The clear beneficiary from this initiative will be Malaysia’s largest Surimi player QL Resources (BUY, FV: RM4.05), as higher fish landing volume will shore up the production of marine products constrained by limited fish supplies.

Goodies galore for the Rakyat. Bantuan Rakyat 1 Malaysia (BR1M) continues with the assistance of RM500 for households with a monthly income below RM3,000. The BR1M is also extended to single unmarried individuals aged 21 and above, earning not more than RM2,000 a month with an amount of RM250. Individual income tax rate will be reduced by 1% for each grouped annual income tax exceeding RM2,500 to RM50,000. We think the income tax saving of up to RM475 is not really significant and will likely have a minimal impact on consumer spending but will be positive nevertheless.

Military forces, civil servants not left out. A special incentive of RM200/month will be given to all military personnel, which will amount to a total of RM301m. The services allowance for military reserve forces comprising the Territorial Army Regiment (WATANIAH) as well as reserves in navy and air force will be revised higher. A one-off RM1,000 will be distributed to former members of the armed forces who have opted for early retirement, served less than 21 years and did not receive any pension. Elsewhere, the country’s 1.4m civil servants will get a one and a half months’ bonus, while the minimum pension for pensioners who have served at least 25 years is raised from RM720 to RM820. We believe the additional income for the military forces and civil servants will likely boost consumer spending going forward.

Trimming sugar subsidies. The Government has cut sugar subsidies by RM0.20 per kg to RM0.34 per kg, with the sugar retail price ceiling correspondingly increased to RM2.50 per kg from RM2.30 per kg. The rise in the price ceiling will place some pressure on domestic sugar consumption as the Government looks to promote a healthier, lower-sugar diet. MSM’s (NEUTRAL, FV RM4.84) domestic selling volume will suffer, although the inelastic nature of sugar consumption should mitigate this decline. An increase in price ceiling (accompanied with a decline in volume) is thus better for MSM than an unchanged price ceiling (and no change in volume).

Maintain OVERWEIGHT. We expect the generous cash handouts to low income households, personal tax rate reduction, special bonuses and incentives for the military forces and civil servants in the 2013 budget to have some spillover effect on the overall consumer sector. Maintain OVERWEIGHT with QL as our Top Buy (BUY, FV: RM4.05).

TELECOMMUNICATIONS

• Individuals aged between 21-30 years and with incomes less than RM3k per month will be entitled for a one-off rebate worth RM200 to purchase one 3G smartphone from authorised dealers.

Spurring smartphone take-up and data usage among youths. This incentive will spur smartphone take-up and data usage, which will in turn boost the telcos’ data revenue. The 21-30 age group is the fastest growing segment among mobile broadband users and a key target of the mobile operators, which are already offering significant handset subsidies. That said, Malaysia's smartphone penetration of 22% is still comparatively lower than 70% for Singapore, a market that thrives on significant subsidies, although ahead of Indonesia's 12% and Thailand's estimated 15%. We maintain our NEUTRAL weighting on the telecoms sector, with a BUY call on TM (FV: RM7.00) and NEUTRAL on Axiata (FV: RM6.04), Maxis (FV: RM6.50) and Digi (FV: RM4.07).

AVIATION

• The Government will allocate RM358m for the tourism sector to target 26.8m tourist arrivals, up 42% from last year.
• Tour operators will continue to receive income tax exemptions, which will be extended another three years. However, the qualifying criteria has increased for tour operators, requiring them to bring in at least 750 foreign tourists or 1500 local tourists a year, up from the previous 500 and 1300 tourists respectively.

Shot in the arm for tourism. Tourism is a key component to GDP, contributing almost 12% and generating an estimated RM62bn in revenue in 2012, with economic spillovers across the board. The increased development expenditure allocated for the tourism sector will benefit the airlines under our coverage as well as airport operator Malaysia Airport Holdings (MAHB), as these companies can capitalise on greater tourism activities. We have an OVERWEIGHT call on the aviation sector, with both AirAsia (BUY, FV: RM3.91) and MAHB (BUY, FV: RM7.53) as our Top Picks.

OIL & GAS

• The Government has offered tax incentives for private entrepreneurs in the oil & gas industry, including a 100% income tax waiver for 10 years and exemption on withholding tax and stamp duty.
• For investment in the refinery activities, investment tax allowance of 100% for the period of 10 years will be provided to qualified companies.
• The Global Incentive for Trading (GIFT) programme will be enhanced with a 100% income tax exemption on statutory income for the first three years of operations for liquefied natural gas (LNG) trading companies
• Few notable projects implemented in 2012 are: i) PETRONAS Refinery and Petrochemical Integrated Development (RAPID), ii) oil and gas storage Terminal in Johor, iii) Regasification Plant in Melaka, and iv) oil and gas terminal in Sipitang, Sabah.

Transforming Malaysia into a global O&G integrated trading hub. In Budget 2013, the Government continues to focus on its vision to transform Malaysia from a producer to a global integrated trading hub for oil and gas, emulating Singapore’s success. The progression towards being a global integrated trading hub for oil and gas would benefit local players as there will be ample opportunities for EPCC jobs for our local players such as SapuraKencana Petroleum and KNM. While Dialog appears to be the key beneficiary from this vision, we believe the tax incentive for private entrepreneurs could give rise to new players in the refining, storage and trading businesses.

Dialog a key beneficiary of Global Incentive for Trading (GIFT). The GIFT programme was introduced in 2011 with a tax incentive of 3% to encourage commodity trading activities. The government is enhancing the programme to spur LNG trading activities by introducing a 100% income tax exemption on statutory income for the first three years of operations for LNG trading companies. We believe that this is positive as it will stimulate trading activities which will in turn, increase demand for storage space and logistic facilities. Dialog would be the key beneficiary if the consortium (which consists of Dialog, the Johor state government and Dutch-based Vopak NV) firms up its investment in the RM4.1bn LNG terminal project in Pangerang.

Maintain OVERWEIGHT. While nothing was highlighted with regard to new contract awards, we believe that there will be more contracts given to our local O&G support services providers in 2H12, as we expect Petronas to beef up its capex very soon. Our top sector pick is Dialog (BUY, FV: RM3.16) and SapuraKencana Petroleum (BUY, FV: RM2.88).

SECTORS WITH NEUTRAL IMPACT FROM BUDGET 2013

AUTOMOTIVE

• There was no announcement relating to a reduction of excise duties and no follow-up on whether the current full tax exemptions on hybrid vehicle purchases will be extended after 2013.
• RM20m will be allocated to fund the purchases of 1000 motorcycles to establish a Motorcycle Patrolling Unit to monitor housing areas.
  

Bikers to ride on Budget. The RM20m allocation for the establishment of the Motorcycle Patrolling Unit and the purchase of 1000 motorcycles will benefit motorcycle manufacturers and assemblers. Beneficiaries are private companies such as MODENAS as well listed players like Hong Leong Industries (Not Rated) which assembles Yamaha bikes, as well as Oriental Holdings which owns a 50% stake in Honda bikes assembler Boon Siew Honda SB. We do not have a rating on both companies. As the 1,000 motorcycles could be high-capacity vehicles for high speed chases and noting that the police force uses Honda bikes, we see Oriental Holdings as a likely key beneficiary.

Still a non-event for auto sector. As we had also anticipated, there were no great developments relating to the auto sector. A separate announcement relating to the sector will be made in the upcoming National Automotive Policy, of which no firm date has been determined yet. For a preview of the NAP, please read our 24 Sept 2012 report titled “On Slower Gear”.

PLANTATION

• RM432m is allocated under NKEA for oil palm replanting program
• RM127m is allocated for the development of high-value oleo derivatives to transform the downstream industry towards higher production of derivatives.
  

A non-event, as the government attempts to address two key issues facing Malaysia’s oil palm industry:

1. A plateau in palm oil production due to aging trees and a lack of new areas for expansion, hence the only solution is to raise yield through replanting with newer material.
2. Moving the downstream industry further and adding further value to it, like encouraging the development of specialised products. This is to counter the surge in Indonesia’s refining capacity which has hurt Malaysia’s downstream players.

We view the amount allocated for replanting as being too minimal to have any impact on Malaysia’s production in the short term. Based on the RM12k replanting cost (cost to maturity), the RM432m allocated is only sufficient to replant 36k ha of oil palm area, or 0.7% of Malaysia’s total planted area of 5.0m ha. Overall, we view the Budget 2013 as NEUTRAL for the plantation sector. Nevertheless, we maintain our OVERWEIGHT stance on the sector on the anticipated substitution due to the shortfall in soybean supply and a deceleration in Indonesia’s production growth next year.

BANKING

• Business trust be given positive tax treatment, stamp duty exemption and real property gains tax exemption
• RPGT increased from 10% to 15% (<two years of purchase) and from 5% to 10% ( >two years and up to five years of purchase)
• SC will provide a framework on the issuance of AgroSukuk
• Retail bonds issuance worth RM300m to finance MRT development projects.
• Government will allocate an additional RM400m to Danajamin for the next two years.
• RM100m to revive 30 abandoned housing projects.
  

Business trust listings to spur fee income upside. We take this as a prediction of more listings of business trusts to come in the future, similar to Berjaya Toto's trust fund listed in SGX. This will further improve the activity of initial public offerings in Malaysia and spur more fee income upside for investment banks with an established strength in corporate finance advisory, in particular banks with experience in IPO deals relating to REITs.

Potential multiplier effect from AgroSukuks. Following the success of FGV’s listing, the government initiated a move to promote the sukuk market. The framework will allow banks to leverage on the structural advantage arising from the potential sukuk issuance in the agricultural sector, which will generate new financing demand. Moreover, we think it is quite possible to witness a spillover effect of the sukuk market into related sectors across the agricultural value chain, thereby enhancing the financing appeal of more sukuk issuances moving forward. Due to this multiplier effect, we view that banks would be more encouraged to switch from conventional corporate bonds issuances to sukuks. We see the likes of Maybank (BUY, FV: RM10.30) and CIMB (BUY, FV: RM8.53) as immediate beneficiaries from this due to their branding and strong exposure in sukuk issuances.

Retail bonds immaterial for the time being. Although we view the Government's initiatives to release the bond market to retailers with tax deductions as a good start, we think that the RM300m retail bond allocation relating to the financing for the MRT project is small relative to the total financing of approximately RM20bn-RM30bn. Hence, we do not foresee significant positive impact from the bond origination fee income for the said retail bonds as the MRT financing will remain largely institutionally-funded.

Danajamin's corporate guarantee unlikely to boost bank earnings. As these bonds are government-guaranteed, we think the margins arising from origination are relatively thin, and hence earning spreads for banks are likely to be insignificant in addition to the relatively immaterial extra funding amounting to RM400m for the next two years. We do not see a major earnings upside for the banks within our coverage.

Tun Razak Exchange (TRC): Long-term project with no immediate- to medium-term impact. The development of the TRC is a long-term project aimed at developing Malaysia as a regional financial hub. The project, which serves as an enabler to boost the financial sector and hence increase foreign competition, is unlikely to make a significant impact on local banks as competition from new foreign banks is likely to be limited to niche sectors. Singapore and Hong Kong will continue to have a significant headstart as well as an edge, with TRC potentially focused on leveraging on Malaysia’s leadership in global Islamic finance to further cement its position in this niche sector rather than competing head-on with Singapore and Hong Kong.

Revival of abandoned housing projects not likely to be significant. We are neutral on the prospects of the RM100m funding for the revival of 30 abandoned housing projects on the banking sector, due to i) the proposed funding is at a mere <0.1% of total industry loans and property loans base, and ii) the risk-averse nature of the banks given the current economic slowdown may prompt the bank to prioritise the viability of the projects as part of more stringent risk management. We believe these combined factors will be a more important consideration for the banks to take into account, rather than the tax exemption benefit itself.

RPGT to add on the pressure. The move to increase RPGT will likely create further pressure or slowing demand for residential and non-residential properties. As highlighted by our property analyst, the hike may create some negative sentiment in the property market though it is largely stable driven by the genuine demand for housing due to our demographic landscape. However, we believe this move will trigger a further moderation in property loans which is likely to impact overall loans growth as properties contributed approximately 40% of total loans base. Also non-residential properties may likely take a hit despite not being subject to 70% loans-to-value (LTV) cap on third housing financing. We believe the strong commercial space/non-residential property growth of late are partly driven by fair degree of speculation risk as developers had attempted to bypass the 70% LTV cap by launching more residential projects under commercial titles in the past. The Budget 2013 cemented our view that we prefer Maybank (BUY, FV: RM10.30) and CIMB (BUY, FV: RM8.53), which have bigger exposure to the ETP-related corporate loans and sukuk origination, and distribution strength. We continue to be cautious on banks skewed towards heavier property franchises or loans segments as the already slowing property market may be further hit by the increase in RPGT post- Budget 2013. We are maintaining NEUTRAL on the sector.

FINANCE

• Several insurance schemes to benefit small business owners and hawkers, fishermen, military, policemen and travelling coverage for school children.
• Tax exemption on investment income of the annuity insurance products from both takaful and insurance companies.
• Additional 1.5 month bonus salary.
  

Lack of tax relief revision a letdown. We are disappointed with that the widely-anticipated revision on tax relief, especially for life and medical insurance premiums, did not materialise. Despite the fact that the Budget has announced a tax exemption on income received from annuity schemes and is encouraging investors to diversify to a retirement savings scheme, we are of the view that this will not be a significant impact in the near-to-mid term as we believe it is a mismatch with the insurance companies' current aggressive rollout of investment-linked products.

No major beneficiaries for proposed insurance schemes. We are of the view that the proposed schemes announced above is not significant enough to boost sales in the private insurance sector as they will be likely undertaken by government- or related-companies. As such, we do not see any major impact on the insurance companies under our coverage. A possible beneficiary may be MNRB (NR, Last Price: RM3.10) as it may benefit from more reinsurance businesses especially from the slightly higher-risk segments from the fishermen and military customers.

More bonuses for civil servants. The Government will pay 1.5 months’ salary bonus to civil servants. Note that in Aug 2012, it had paid a half-month bonus, or a minimum of RM500 to civil servants in conjunction with the Hari Raya Aidilfitri festive season. Thus a net one-month’s salary bonus will be payable in Dec-Jan 2013. Civil servants have enjoyed a string of goodies and benefits since the Budget 2012, with a major impact being the finalisation of the Malaysian Remuneration Scheme for an annual pay hike of between 7% and 13%.

Further upside to spur MBSB's loans growth forecast of 51%. We see MBSB (BUY, FV: RM3.02) as the key beneficiary for its niche civil servants personal loans, thanks to its privilege salary reduction code via Angkasa, given the continuous benefits enjoyed by civil servants. This is in addition to the potentially large addressable market, as Malaysia's 1.4m civil servants has one of the highest civil servants-to-population ratio (approximately 4.9% as of 2011) in the world. We have revised our growth of Federal government's
emoluments for 2012 to a conservative 7%, in line with the pay hike, and arrive at a potential increase in a civil servants’[ personal loans market of between RM68bn and RM129bn. Note that our 7% forecast is already conservative, as we have not taken into account other goodies such as the: i) RM500 payable to 675k pensioners, ii) RM50 hike in cost of living allowances, and iii) separate benefits paid by the individual state governments to civil servants within their jurisdiction.

SECTORS WITH NEGATIVE IMPACT FROM BUDGET 2013

PROPERTY

• Increase the real property gains tax (RGPT) from 10% to 15% (<2 years of purchase) and from 5% to 10% ( >2 years and up to 5 years of purchase)

RPGT hike no surprise. The increase in the RPGT was no surprise given that it has been highly speculated over the last few months. Understandably, the move aims to curb speculation in the property market in order to keep houses affordable as well as reduce the risk of a property bubble. However, we doubt that this measure would be effective since the speculation is at a manageable level and the rise in property prices is largely driven by genuine demand for housing due to demographic factors. The hike might discourage some speculators but the strong holding power due to the low interest rate environment will provide a buffer for speculators to hold a property longer before disposing of it. While the hike might dampen sentiment in the property market over the short term, we think the impact on property developers is minimal. Maintain Neutral on the sector.

Source: OSK