2013 Budget Focus - People‐Friendly but Market‐Muted As Expected

As expected, while we agree that the 2013 Budget is definitely people‐friendly; its impact to the market could be muted. Nonetheless, as the Government is committed to continue reducing the fiscal deficit further to 4% of the GDP in 2013 from 4.5% in 2012, we believe this will reaffirm the country’s sovereign rating and hence boosting the appreciation of the ringgit and ultimately the local equity market. Despite a market‐neutral budget and uncertainties over the General Elections, we are cautiously optimistic. However, due to the low visibility of the market direction, we prefer to advocate a “Buy‐on‐Weakness” strategy into (i) Consistent Performers, (ii) Defensive and Low‐ Beta yield stocks and (iii) specific budget beneficiaries. Our 12‐month Index Target has fine‐tuned to 1,745 (from 1,750) and our end‐2012 target has been reduced to 1,660 (from 1,680).

2013 Budget focus. The 2013 Budget focused on improving the quality of life of the rakyat, ensuring sustainable economic growth, spending prudently and reducing the fiscal deficit with the overall objective of prioritising the well‐being of the rakyat. Its five focus areas are (i) Boosting investment activity, (ii) Strengthening education and training, (iii) Inculcating innovation and increasing productivity, (iv) Fiscal consolidation and enhancing the public service delivery and (v) Enhancing the well‐being of the Rakyat.

On the macro front, we believe that there is no widespread impact to the entire equity market as there was no corporate tax cut being announced. However, as the Government is committed to continue reducing the fiscal deficit further to 4% of the GDP in 2013 from 4.5% (previously targeted at 4.7%) in 2012, we believe this will reaffirm the country’s sovereign rating and hence boosting appreciation of the ringgit and ultimately the local equity market. However, strengthening in ringgit could be a bad news for export‐orientated corporates.

Good for the consumer sector in general. Due to its people‐friendly measures (see overleaf for details), we believe that the budget was generally good for the Consumer sector (for both F&B and Retail sub‐segments) due to it creating a higher disposable income.   Even with the cut in the subsidy on sugar, we do not expect this to hit any of the companies under our coverage. Besides, as there was no announcement of any tax hikes for the sin sector, we do not rule out that there could be some run‐ups in tobacco and brewery stocks. Our OUTPERFORM calls in the consumer sector are NESTLE (OP; TP: RM67.50) and OLDTOWN (OP; TP: RM2.26). Other beneficiaries. Some specific stocks that could benefit from the budget announcement are BURSA (OP; TP: RM7.70) and MBSB (OP; TP: RM2.70) from the introduction and promotion of retail bond and the 1½ months bonus announcement for the civil servants. Other sectors seen benefitting are the (i) Oil & Gas, (ii) Education and (iii) Gaming sectors. In a nutshell, the tax incentives of a 100% tax holiday for ten years for the private sector involvement in oil & gas, including assistance for land acquisition and in RAPID should benefit DIALOG (OP; TP: RM2.79), PCHEM (OP; TP: RM7.46) and PETGAS (Not Rated). Being the first mover in the RAPID project in Pengerang, DIALOG (OP; TP:RM2.79) will first to benefit a 10‐year 100% investment allowance and later a 3‐year 100% income tax exemption for its GIFT status. PCHEM (OP; TP: RM7.46) and PETGAS (Not Rated) should benefit under the investment allowance as well for their SAMUR and Melaka RGT projects, respectively. Incentives given to open new pre‐schools, private childcare centres as well as for trainings in technical and vocational fields should benefit SEG (OP; TP: RM2.45) the most, and HELP (MP; TP: RM2.02) as well. As for the gaming sector, as usual, no news is good news for sector. We could probably see some run‐ups in gaming stocks as they were hammered severely in the past week on fears of a gaming tax hike. MPHB (OP; TP: RM4.31) remains our TOP PICK in this space and we are “buyers” of GENTING (OP; TP: RM10.09) and GENM (OP; TP: RM4.20).

Bad for property developers. The increase in the RPGT (<2 years RPGT raised from 10% to 15% and <5 years RPGT raised from 5% to 10%) is generally bad for developers. Theoretically, developers that have meaningful/significant earnings contributions from the affordable hosing segment i.e. HUAYANG (Not Rated) and IJMLAND (MP; TP: RM2.60) should be sheltered from this tax hike. However, the hike in the RPGT was largely expected and hence the negative impact could have been priced in.   As such, we do not rule out relief rallies being seen in the most heaviest hammered property stocks. Our 4Q12 Top Pick remains as UOADEV (OP; TP: RM2.30) for its strong dividend yields of 7.9% and its high dividend payout ability.

Source: Kenanga