• Expansionary budget as expected. Budget 2022 will be the nation’s largest, with an allocation of MYR332.1bn. There were a slew of measures supporting the lower-income group and small businesses, coupled with a hefty MYR75.6bn allocation for development expenditure (DE). The extension of the sales tax exemption, along with tax exemptions for electric vehicles (EVs), means that the auto and consumer sectors are the outright winners. Construction lacked emphasis on significant infrastructure projects to capture investor imagination. Property missed out on yet another opportunity to revive the moribund sector.

• Construction sector weighting cut to NEUTRAL. Despite the 22% YoY increase in DE allocation, much of this is focused on the execution of existing infrastructure projects, rural construction works, and telecommunication networks. We downgrade sector heavyweight Gamuda to NEUTRAL from Buy, as we expect to see muted sector developments and limited rerating opportunities in the near term.

Alexander Chia
+603 9280 8889
alexander.chia@rhbgroup.com

• Auto and consumer FTW. The comprehensive tax incentives for EVs are long overdue, and helps to get Malaysia back on track with regional markets to drive EV adoption. Direct and indirect initiatives to support consumers – including paring back the rate of employee contributions to the federal providence fund – will help to underpin resilient consumer spending attributes. Uncompelling valuations mean that the weighting for the consumer sector remains NEUTRAL.

• Cukai Makmur and new stamp duty rules are negative surprises. This one-time additional corporate tax of 33% is applied on companies reporting taxable income in excess of MYR100m (24% for the first MYR100m). We estimate a worst-case impact of up to 12% on corporate earnings, although this should be offset by the positive spillover to the broader economy from the expansionary budget proposals. Such a windfall tax is unprecedented in scope and scale – and should be categorised by investors as a policy risk, as well as a negative from the perspective of attracting new foreign direct investments and regional competitiveness, reflecting the country’s narrow revenue bandwidth and limited fiscal headroom. The stamp duty increase on contract notes to 15bps from 10bps, and removal of the MYR200.00 cap could dampen Bursa Malaysia’s trading velocity.

• Strategy. While the ongoing domestic economic recovery story will be supported by the consumer-friendly Budget 2022, evolving policy risks and the market’s adjustment to the broad scope of the windfall tax will add to market volatility. Given the overhanging external risks and lack of a clear roadmap to achieve further fiscal consolidation going forward, we expect the market to re-rate lower, even as forward P/Es spike higher with downside risks to FY22 earnings. Nonetheless, a sharp pullback could be an opportunity to re-weight into recovery plays at lower levels, including looking out for “bombed-out” stocks. OVERWEIGHT sectors include banks, healthcare, gaming, basic materials, oil & gas, transport, and logistics.

Source: Company data, RHB

FIRST FOCUS: THE RAKYAT’S WELL-BEING

STRATEGY 1: RESTORING LIVES AND LIVELIHOODS

Initiative 1: Direct cash assistance and welfare

Allocation of MYR8.2bn for Bantuan Keluarga Malaysia to channel assistance of MYR2,000 to households earning less than MYR2,500 per month with three or more children:
1. Additional assistance of MYR500.00 to single parent households and MYR300.00 to senior citizen households;
Increase the income eligibility requirement for welfare assistance managed by the Social Welfare Department in line with the 2019 Food Poverty Line Income at MYR1,169 vs the 2019 Food Poverty Line Income of MYR980.00;
Provide MYR25m to Yayasan Keluarga Malaysia to ensure the welfare of children orphaned due to COVID-19.

Initiative 2: Access to public healthcare facilities

Allocation of MYR32.4bn for the Ministry of Health:
1. MYR4bn to continue the agenda on managing COVID-19, MYR750m for the supply of medicine, and MYR190m outsourcing of medical services to hospitals and private laboratories;
MYR100m allocated for the sponsorship of medical specialist programmes for the benefit of 3,000 medical and dental contract officers;
Expand the imposition of excise duties on sugary drink products in the form of premixed cocoa, malt, coffee, and tea;
Impose excise duties on liquid or gel products containing nicotine used in electronic cigarettes and vaping;
Allocate MYR70m to strengthen mental health support services.

Initiative 3: Quality education for all

Allocation of MYR52.6bn and MYR14.5bn for the Ministries of Education and Higher Education;
Allocation of MYR450m from the Government and MYR65m from telecommunication companies to implement the Peranti Siswa Keluarga Malaysia initiative to supply a tablet to every B40 student in institutions of higher learning;
Extend the special individual income tax relief up to MYR2,500 for the purchase of mobile phones, computers, and tablets until 31 Dec 2022;
Provide MYR6.6bn to strengthen the vocational education & training or TVET sector by implementing various initiatives under the relevant ministries and agencies;
Discount on the repayment of National Higher Education Fund Corp or PTPTN loans from 1 Nov 2021 till 30 Apr 2022 – ranging from 10% to 15%.

Initiative 4: Generating and sustaining jobs

Allocation of MYR4.8bn for the Jamin Kerja Keluarga Malaysia or JaminKerja initiative;
Hiring incentive for employers via the JaminKerja initiative targeting 300,000 people with an incentive of 30% of monthly salaries for the first six months and 40% for the next six months for jobs with salaries of MYR1,500 and above;
Continuation of the Malaysia Short-term Employment Programmes or MySTEP by offering 80,000 contract employment opportunities and 220,000 trainees to undergo upskilling and reskilling programmes;
Increase the limit of individual income tax relief for upskilling course fees to MYR2,000 from MYR1,000:
1. Tax relief of up to MYR7,000 for courses with any professional bodies.

Initiative 5: Social protection

Stamp duty exemption for the Perlindungan Tenang product as well as insurance or takaful products with premiums not exceeding MYR150.00 and MYR250 for individuals and micro, small & medium enterprises or MSMEs;
Allocation of MYR30m for the expansion of i-Saraan to include those aged between 55 and 60 years;
Expand the protection coverage under the Social Security Organisation or SOCSO by contributing for self-employed and informal workers.

Initiative 1: Bumiputera development and Syiar Islam

Continuing the Bumiputera empowerment agenda through an allocation of MYR11.4bn;
MYR200m allocated to encourage the participation of Bumiputera youths in implementing small-scale government procurement projects.

Initiative 2: Community empowerment

Provision of MYR200m and MYR145m for the socio-economic development of the Chinese and Indian communities;
MYR274m allocated to implement programmes in improving the living standards of the Orang Asli community.

Initiative 3: Female empowerment

Mandatory appointment of at least one woman on the board of directors for all public listed companies by 1 Sep 2022 for big-cap companies and 1 Jun 2023 for small- and mid-cap firms;
Allocation of MYR30m provided for childcare in government buildings to improve existing support systems for working mothers.

Initiative 4: Community-focused empowerment

Allocation of MYR635m for the purpose of welfare assistance, care institutions, and senior citizen activity centres;
The Government is to bear the full cost of motor vehicle road tax on all private vehicles owned by the disabled in 2022.

Initiative 5: Youth and sports development

Improving the monthly incentive to MYR900.00 from MYR800.00 previously for employers who employ apprentices for a period of up to six months in 2022;
Allocation of MYR300m to credit MYR150.00 as one-off payments into the e-wallet accounts of youths aged 18-20 to foster a culture of cashless transactions.

STRATEGY 3: BUILDING A CONDUCIVE LIVING ENVIRONMENT

Initiative 1: Alleviating the cost of living

Allocation of MYR31bn for subsidies, aid, and incentives intended to mitigate the rising cost of living via price controls;
Reduction of the minimum employee contribution rate to the federal statutory providence fund to 9% from 11% will be extended up to Jun 2022, involving a potential value of MYR2bn;
Extension of the 100% sales tax exemption on CKD passenger vehicles and 50% on CBU vehicles – including SUVs and MPVs – for six months until 30 Jun 2022.

Initiative 2: Home ownership

Provision of MYR1.5bn to continue housing projects, specifically for low-income groups. The Government will also not impose Real Property Gains Tax or RPGT from the disposal of real property in the sixth year onwards.

Initiative 3: Access to public transportation

Allocation of MYR209m as subsidy for air transportation in Sabah and Sarawak.

Initiative 4: Rural infrastructure

Commitment of MYR2.5bn to improve rural roads and utility infrastructure.

Initiative 5: National defence and public safety

Allocation of MYR16bn and MYR17bn for the Ministries of Defence and Home Affairs.

SECOND FOCUS: RESILIENT BUSINESSES

STRATEGY 1: REVIVE BUSINESS CAPABILITIES

Initiative 1: Microcredit scheme

Microcredit financing worth about MYR1.8bn will be provided through various agencies such as TEKUN Nasional, Agrobank, Bank Simpanan Nasional, Bank Rakyat, and Bank Negara Malaysia or BNM on an interest-free basis;
Allocation of MYR1.75bn to fund programmes aimed at providing food truck business sites in major urban areas.

Initiative 2: Business and alternative financing

Provision of MYR2.1bn to support equity and quasi-equity investment schemes to assist companies facing gearing or leverage problems;
The Government aims to assist public-listed companies that were affected by the COVID-19 pandemic via an injection of additional funds through equity or other related instruments. Khazanah Nasional will be given the mandate in providing the infrastructure to manage the fund size of at least MYR3bn.

Initiative 3: Business financing guarantee

Syarikat Jaminan Pembiayaan Perniagaan or SJPP will enhance the scheme with an additional guarantee limit of MYR10bn – this is to provide guarantees for loans being rescheduled and restructured for companies in need, with MYR2bn being dedicated to Bumiputera businesses.

Initiative 4: Ease of doing business

A special fund for strategic investments up to MYR2bn will be prepared to attract strategic foreign investments by multinational companies;
Extension of tax deduction of up to MYR300,000 on the cost of renovating and refurbishing business premises until 31 Dec 2022 in order to comply with relevant SOP requirements;
For companies registered under Safe@Work, a further tax deduction of up to MYR50,000 on rental expenses of employees' accommodation premises will be extended until 31 Dec 2022;
Excise service:
1. A deferment of income tax instalment payments for MSMEs for six months until 30 Jun 2022;
2. All businesses are allowed to amend the estimated income tax payable on the 11th month before 31 Oct 2022;
3. A special tax deduction to the owners of buildings or business premises that provide rental reductions to tenants of at least 30% from the original rate to be extended until Jun 2022;
4. That accumulated unabsorbed business loss tax treatments that can be carried forward to be reviewed from seven consecutive years of assessment to a maximum of 10 consecutive years of assessment.

STRATEGY 2: DRIVING STRATEGIC INVESTMENTS

Initiative 1: Investments in key sectors

A special fund for strategic investments up to MYR2bn will be prepared to attract strategic foreign investments by multinational companies;
MYR25m is allocated under Budget 2022 to explore high-impact investments and new export markets through Trade & Investment Missions;
A matching grant of MYR100m will be provided to Bumiputera SMEs to explore business opportunities in the aerospace segment;
The Government will allocate MYR100m to provide Smart Automation matching grants to 200 companies in the manufacturing and services sectors to automate their business processes;
Extension of the Additional Reinvestment Allowance or RA for two years for existing companies in Malaysia that have exhausted their RA and Special RA eligibilities.

Initiative 2: Science, technology, and innovation

Allocation of MYR423m under the Ministries of Science, Technology & Innovation or MOSTI and Higher Education to intensify R&D activities;
Allocation of MYR12m via matching grants through collaborative research in engineering, science, and technology in areas such as gallium nitride for application in light-emitting diodes or LEDs and EVs;
MYR30m will be prepared to implement the Innovation Hub: Industrial Revolution 4.0 under Technology Park Malaysia;
Cradle Fund will be allocated MYR20m to intensify recovery efforts and build the resilience of the start-up economy;
Allocation of MYR45m as a technological transformation incentive for SMEs and midstage companies in the manufacturing and services sectors – in line with Industrial Revolution 4.0 or Industry4WRD.

Initiative 3: Perkukuh Pelaburan Rakyat or PERKUKUH initiative

At least MYR30bn will be allocated for capital expenditure and investments next year. Government-linked companies or GLCs will continue to invest in areas including renewable energy, supply chain modernisation, and 5G infrastructure;
Khazanah Nasional has prepared an Impact Fund amounting to MYR6bn as a catalyst towards the growth of new high-value industries.

STRATEGY 3: RECOVERY FOR TARGETED SECTORS

Initiative 1: Tourism industry

Several key initiatives with a total value of MYR1.6bn will be implemented next year – this includes the implementation of the Wage Subsidy Programme or WSP targeted at tourism industry players;
Various financing and funding for the tourism sector amounting to MYR875m;
Special individual income tax relief for domestic tourism expenses up to MYR1,000 to be extended until Year of Assessment 2022;
An allocation of MYR20m to the Malaysia Healthcare Travel Council;
Exemption on entertainment duties for entertainment activities in all Federal Territories until 31 Dec 2022. State authorities are similarly advised.

Initiative 2: Creative industry

A total of MYR188m is provided to continue creative industry initiatives.

Initiative 3: Retail industry

Total of MYR285m is allocated to various campaigns and programmes aimed to stimulate the retail industry, eg Shop Malaysia Online and Malaysian Sales Programme;
Perbadanan Nasional or PERNAS will provide MYR74m, among others, to provide training programmes and business guidance, as well as a simple zero-financing scheme for the first six months together with a moratorium.

Initiative 4: Agriculture industry, food security, and commodities

The granting of subsidies and incentives for the agriculture and fisheries industries will be continued with an allocation of MYR1.7bn;
A financing programme of up to MYR1.25bn will be provided by Agrobank and BNM through – among others – the AgroFood Facility amounting to MYR500m and AgroFood Financing Fund amounting to MYR200m;
To support the oil palm industry, the Government has allocated MYR35m to implement the Smallholder Farmers’ Oil Palm Replanting Stimulus Scheme and MYR20m to address anti-palm oil campaigns at international levels;
To increase the windfall levy threshold value for palm oil to MYR3,000 from MYR2,500 for West Malaysia and to MYR3,500 from MYR3,000 for East Malaysia. Meanwhile, the Sabah and Sarawak levy rates are adjusted to 3%, ie similar to the rates in West Malaysia.

THIRD FOCUS: A PROSPEROUS AND SUSTAINABLE ECONOMY

STRATEGY 1: SUSTAINABILITY AGENDA

Initiative 1: Low-carbon practice

Launching of Voluntary Carbon Market or VCM for carbon credit trading by Bursa Malaysia;
Matching grants – ease of transition to low carbon;
Exemption from import duty, excise duties, and sales tax for EVs.

Initiative 2: Environment and biodiversity

Allocation of MYR115m for nature conservation and preservation projects;
100m tree planting campaign.

Initiative 3: Community empowerment

Income tax exemption on social enterprise income;
A maximum of five days of unrecorded leave per year for civil servants engaging in non-governmental organisation or NGO activities.

Initiative 4: Sustainability sukuk

Issuance of sustainability sukuk worth up to MYR10bn.

STRATEGY 2: BRIDGING THE ECONOMIC GAP

Initiative 1: Development projects for recovery

Allocation of MYR3.5bn for national infrastructure development projects such as the construction of the Pan Borneo Highway and Central Spine Road;
Infrastructure Facilitation Fund 3.0 to boost high-impact infrastructure development activities through public-private partnerships;
Small- and medium-sized projects worth MYR2.9bn earmarked for contractors in Classes G1 and G4.

Initiative 2: Inter-regional development

Allocation of MYR690m for the five regional economic development corridors;
State-specific allocation of MYR20m per state to focus on projects related to food security, tourism, and environmental preservation and conservation;
DE allocation for Sabah and Sarawak worth MYR5.2bn and MYR4.6bn;
An additional 20 mobile banks in 250 rural areas.

Initiative 3: Digital connectivity projects

Allocation of MYR700m for continuation of JENDELA

STRATEGY 3: FISCAL CONSOLIDATION AND REVENUE SUSTAINABILITY

Initiative 1: Fiscal Responsibility Act (FRA)

Introduction of FRA to improve governance, accountability, and transparency in the country’s fiscal management.

Initiative 2: Revenue sustainability measures

Revenue sustainability measures:
1. Increase of stamp duty rates on contract notes from 0.1% to 0.15% and abolishment of MYR200.00 stamp duty limits;
2. Exemption of brokerage services related to the trading of shares listed on Bursa Malaysia;
Imposition of Cukai Makmur, a marginal income tax rate of 33% for companies with chargeable income of more than MYR100m for Year of Assessment 2022.

STRATEGY 4: SUPPORTING PUBLIC SERVICE DELIVERY

Initiative 1: Reforming service delivery

MyDigital initiative:
1. Implementation of the National Digital Identity project to enable secure digital transactions.

Figure 1: Earnings outlook and valuations FB

Note: Excludes FBM KLCI stocks not under RHB Research’s coverage, ie Hong Leong Financial Group, RHB Bank, PPB, and Hap Seng Consolidated Source: Bloomberg, RHB

Figure 2: FBM KLCI – weightings & valuations

Source: Bloomberg, RHB

Figure 3: Top BUYs

Note: ^FY21-22 valuations refer to those of FY22-23
Source: RHB

Figure 4: Top SELLs

Note: ^FY21-22 valuations refer to those of FY22-23
Source: RHB

Figure 5: High-dividend yield stocks

Note: ^FY21-22 valuations refer to those of FY22-23
Source: RHB

Figure 6: RHB basket sector weightings & valuations

Source: RHB

Sector Review
Banks: Tailwinds still outweigh minor setback - OVERWEIGHT

No direct negative surprises from Budget 2022. There are no specific measures that directly impact banks from Budget 2022. This should remove any overhang investors have regarding further relief measures to assist borrowers – but at the expense of the banks.

Writeback cycle potentially delayed. Given the higher corporate tax rate, we believe this could result in a delay in the writeback cycle to 2023 from 2H22, as banks could manage earnings to avoid paying more taxes. That said, we are not perturbed by this, given that it is just a timing issue – we still believe a writeback cycle is highly likely.

Hardest-hit sector by higher tax rate... While the one-off higher tax affects all companies that earn more than MYR100m in 2022, the banking sector will see the largest absolute impact, in our view. This is given the size of the industry’s earnings base, although the percentage is roughly in line with other sectors (c.10-12%). Depending on the fine print, banks with bigger non-Malaysian operations could see lower impact vis-à-vis peers of similar earnings size. Note: Malayan Banking and CIMB derive 20% and 35% of their respective earnings from non-Malaysia markets.

…but still one of the best recovery proxies. We remain OVERWEIGHT on the sector despite the tax impact for two reasons: i) The measure is not banking specific and ii) the sector is still one of the best proxies for economic recovery and rate hikes.

Minimal impact from higher trading stamp duties. The higher trading stamp duty of 15bps from 10bps plus a MYR200.00 cap will likely dampen trading activities on Bursa Malaysia, in our view. A direct impact to banks, however, is very manageable, given the insignificant revenue contributions from brokerage income, ie less than 6% of NII + non-II.

Liew Wai Hoong +603 9280 8859
liew.wai.hoong@rhbgroup.com

Fiona Leong +603 9280 8886
fiona.leong@rhbgroup.com

Basic materials – A taxation reprieve - OVERWEIGHT

Maintain OVERWEIGHT. Budget 2022 was a non-event for the basic material companies we cover for the most part, aside from the announcement of a one-off windfall tax on FY22 chargeable income above MYR100m. Having said that, its impact to both Press Metal (PMAH) and Cahya Mata Sarawak (CMS) would likely be limited, in our view, due to a ringfenced earnings base with a reprieve by existing tax exemption schemes. Under this context, our sector Top Pick PMAH would appear to stand out on a relative basis vis-à-vis other KLCI constituents.

Specifically, 89% of Press Metal’s smelting capacity of 1.08m tonnes is based in Samalaju Industrial Park under its subsidiary Press Metal Bintulu or PMBTU, which was granted the pioneer status-related tax holiday by the Malaysian Investment Development Authority – the current iteration lasting until end 2022, with the right to apply for extension of the waiver for another five years until 2027 subsequently. As such, we believe the 9% incremental tax rate’s potential impact would likely be largely limited to its older Mukah smelting plant (11% of capacity) and extrusion operations, whose minor contribution to its FY22F earnings base (c.10-15%) should translate into a less than 2% impact on EPS next year.

As for CMS, its relatively smaller earnings base of about MYR200m, plus segregated income streams from various operations and associates/JVs, including a tax-exempted ferroalloy producer in OM Sarawak situated also in Samalaju, should cushion the group as well from the windfall tax impact, to a large extent.

Lester Siew +603 9280 2181
lester.siew@rhbgroup.com

Technology: Ramping up the adoption of cashless transactions – OVERWEIGHT

Under Budget 2022, the Government will credit MYR150.00 as a one-off payment into the e-wallet accounts of youths aged 18-20 years, as well as to full-time students at institutions of higher learning under the eStart Programme – this is to foster a culture of cashless transactions at business premises. 2m youths stand to benefit from this one-off allocation, which amounts to MYR300m in total.

GHL Systems and Revenue Group, as well as Managepay Systems will stand to benefit from the boost in cashless transactions, where both their online and offline solutions are expected to capture the increase in transaction payment value.

Lee Meng Horng +603 9280 8866
lee.meng.horng@rhbgroup.com

Auto: Not one but two direct goodies – NEUTRAL

This is the first time in many years where direct incentives are being given to the automotive sector. Under Budget 2022 there were two, namely:

While the possibility of an extension of the ongoing SST exemption has been well-discussed and does not come as a surprise to us, the timing of the announcement took us by surprise, as – historically – such announcements only happen towards the end of the exemption period. With the announcement coming two months earlier than we initially anticipated, we think our FY21 TIV assumption of 500,000 units is not achievable – this is because the runup to the end of the SST exemption is no longer applicable.

An additional 6-month extension to the on-going Sales & Services Tax or SST exemption for passenger vehicles until Jun 2022 – 100% for CKD and 50% for CBU;
A suggestion to provide incentives to boost the take-up rates of battery electric vehicles or BEVs through full exemptions of import and excise duties, as well as SST. There are also exemptions given to EV road tax of up to 100% and up to MYR2,500 in individual income tax relief being given for the purchase and installation, rental, and hire-purchase of EV charging facilities, as well as payment of EV charging facility subscription fees.

Conversely, we are positive on the EV incentives being given to consumers, as this is a much-needed shot in the arm to drive the adoption rate of BEVs. The exemptions in duties and SST, in our view, will close up the price gap between traditional internal combustion engine or ICE vehicles and EVs. As per the appendix, the proposed tax incentives for EV applies to passenger vehicles (including SUVs and MPVs), commercial vehicles, and motorcycles, but we are unsure if they will be extended to the whole spectrum of EVs, including hybrid EVs or HEVs and plug-in hybrid EVs or PHEVs. We continue to await the Low Carbon Mobility Blueprint, where we understand the use of low-carbon alternatives – such as energy-efficient vehicles, hybrid vehicles, and EVs – will be promoted.

Lee Meng Horng +603 9280 8866
lee.meng.horng@rhbgroup.com

Figure 7: Proposed incentives for the automotive sector

Source: Budget 2022

FY21 and FY22 TIV assumptions revised to 470,000 and 540,000 units from 500,000 and 500,000 previously. Our view remains largely unchanged; we think the extension in SST exemptions to June will not be as effective as before. This is because consumers intending to take advantage of the discount will have already done so in the past 16 months, in our view. Despite that, we are forecasting a higher FY22 TIV of 540,000 units, implying 15% YoY growth. This is because we think environmental-conscious consumers have been waiting for such incentives and may now finally be able to take advantage of it.

With regards to EV exposure in Malaysia, we like Sime Darby, given that the group has the widest selection of EVs in Malaysia and a solid pipeline of BEV launches through the brands it represents. Assuming the EV incentives are only applicable to BEVs, we no longer like UMW due to the lack of exposure in the BEV segment. Additionally, we think this could be the death knell for PHEVs if the tax exemption is exclusive for BEVs only.

Downside risks to the sector recovery include persistent shortages of key components and delays in new model launches. With a mutating COVID-19, we cannot rule out further rolling lockdowns ahead – which we believe will trigger downside risks as well. Other downside risks include the tightening of bank approvals for car loans and a sharp weakening of the MYR.

Eddy Do Wey Qing +603 9280 8856
wey.qing.do@rhbgroup.com

Construction: The wait continues – NEUTRAL

We downgrade the construction sector to NEUTRAL from Overweight, following our revision of heavyweight Gamuda from Buy to NEUTRAL, as we expect to see muted sector developments and limited rerating opportunities in the near term. While the federal DE will be at MYR75.6bn for 2022F – marking a 22% YoY increase, and the highest-ever figure recorded between 2007 and 2021F – much of this was given emphasis at the Budget 2021 announcement, on the execution of existing infrastructure projects, rural construction works, and telecommunication networks.

Despite the elevated MYR75.6bn federal DE amount (2020: MYR62bn), the proportion of allocation to transport continued to dip from 25% prior to the pandemic to 20.5% in 2022F, (2021: 21%). The transport DE of MYR15.5bn still represents a double-digit YoY increase of 19%, but much of this is likely to revolve around the continuation of existing projects such as the Pan Borneo Highway, Electrified Double-Track Railway connecting Gemas with Johor Baru, Rapid Transit System (RTS), and expansion of air and sea ports. Meanwhile, new projects that were explicitly mentioned are tied to small-scale refurbishment/upgrading works for roads and bridges.

On the other hand, despite the glaring omission of fresh mega projects such as Mass Rapid Transit Line 3 (MRT3) once again, we note that the latter nevertheless garnered a mention in the Ministry of Finance’s accompanying economic outlook report as one of the main drivers for public investment to rebound 24% YoY in 2022. We believe this could indicate that, while MRT3 is still very much in the Government’s sights for development planning next year, its direct allocation under the federal DE may be relatively small due. This is due to a late roll-out in 2022, and/or being contingent on securing quasi-public/private funding via MRT Corp and also construction companies.

Amid the lack of fanfare and uncertainties surrounding the roll-out of previously touted mega projects in the pipeline, we elect to take a more cautious stance on the sector while awaiting more details to come to light, as we head into 1H22. This comes with our downgrade on Gamuda to NEUTRAL – largely on valuation grounds, as the sector heavyweight has enjoyed a 24% share price rebound since its August low of MYR2.62, while further re-rating catalysts should be far and few between over the near term. We also flag the greater perceived exposure of big-cap players such as Gamuda to the one-off windfall tax’s earnings impact for FY22, which also prompts us to reiterate our preferred sector picks for mid-cap names with a strong orderbook cover, as well as robust balance sheets – Sunway Construction and Kerjaya Prospek.

Upside risks are: Unexpected acceleration in progress works, quicker-than-anticipated rollout of fresh mega infrastructure projects, and ebbing operating cost pressures. The opposite situations of the three circumstances mentioned above should constitute downside risks.

Lester Siew +603 9280 2181 (Building materials)
lester.siew@rhbgroup.com

Eddy Do Wey Qing +603 9280 8856 (Construction)
wey.qing.do@rhbgroup.com

Consumer: As supportive as usual – NEUTRAL

Unsurprisingly, cash handouts, a consumer-friendly measures have been included again in the national budget announcement – badged as Bantuan Keluarga Malaysia or BKM this time. Meanwhile, the option of lowering employee contributions to the federal providence fund will be extended until Jun 2022. This is estimated to release funds amounting to MYR2bn. Both measures are direct and effective tools in supporting consumer spending, and will underpin sector fundamentals. Similarly, various retention proposals and schemes have been lined up with the aim of creating jobs and containing the unemployment rate, and this should lead to an improvement in consumer sentiment.

The Government has proposed to expand the imposition of excise duties on sugary drink products to pre-mixed chocolate or cocoa, malt, coffee and tea products. The companies under our coverage that will be impacted by this include Nestle Malaysia and Power Root. The actual impact is difficult to quantify at this point, given the scarce details available, but we believe the companies will try to mitigate the impact by reducing the sugar content of the premixed products. That said, we believe any eventual hike in costs arising from the excise duty is likely to be passed on to consumers, taking into consideration the environment of rising raw material costs.

The Government has also proposed to impose an excise duty on gel and liquid-based nicotine products used for e-cigarettes and vaping. We believe this is a slight positive to level the playing field for British American Tobacco or BAT and the legal tobacco industry. However, it is disappointing as there was no mention of a regulatory framework for the newgeneration tobacco products, which would be essential in facilitating the launch of such products by legal tobacco players like BAT. Meanwhile, we are relieved that there will be no hike in the excise duty rate for conventional cigarette and beer products.

As highlighted earlier, the Government is looking to offer support to sectors that have been significantly affected by the pandemic, including tourism and retail. There were measures to encourage domestic tourism and related spending: The individual income tax relief of up to MYR1,000 for domestic tourism spending is extended for another year, while the Government has also proposed the exemption of the entertainment duty for leisure activity outlets such as theme parks and cinemas in all parts of the Federal Territories. Meanwhile for the retail industry, the Government will continue the successful Shop Malaysia Online and Go-eCommerce Onboarding campaigns, to smoothen the transition to digital services.

As for the windfall tax under Cukai Makmur, the companies under our coverage forecasted to report FY22 PBT of below MYR100m would be 7-Eleven Malaysia, Berjaya Food, Mynews, NTPM, and Power Root.

All in all, we are nominally positive on Budget 2022. We maintain our NEUTRAL rating on the sector in anticipation of a consumer spending recovery ahead, but current valuations are not compelling. Our Top Picks include Mr DIY, Mynews, and Berjaya Food.

Soong Wei Siang +603 9280 8865
soong.wei.siang@rhbgroup.com

Property: Just when you thought… – NEUTRAL

In Budget 2022, the Government proposed the following:

MYR1.5bn has been allocated for low-cost housing projects with another MYR2bn set aside for a housing credit guarantee scheme to help potential home buyers without a stable income to buy a house;
The RPGT on Malaysians, permanent residents, as well as other than companies disposing of their real property assets from the sixth year onwards is now abolished.

The “goodies” announced by the Government came in below market expectations in our opinion. Apart from the usual allocation for low-cost/affordable housing projects, the Government is now removing the RPGT for disposal of properties beyond Year 5. While we welcome this proposal, we think the effort is futile and insufficient to stimulate the property market, considering the sector is still reeling from the effects of the pandemic. In addition, interest from local and foreign property investors and speculators have largely been wiped out over the past 5-6 years – ever since the Government introduced a slew of tightening measures in 2014. Recall: In Jun 2020, the RPGT was waived for disposals of up to three residential properties per individual.

Although the Government may still possibly announce the extension of the Home Ownership Campaign or HOC in December, the incentive for developers to pursue strong property sales growth in 2022 – after the year of prolonged lockdowns in 2021 – will be lacking, given the steep increase in corporate tax next year, ie Cukai Makmur.

We maintain our NEUTRAL rating on the sector. We will likely see a sell-down among the property stocks in the near term, as the sector recently rallied rather significantly. This was because the market had possibly anticipated a favourable Budget 2022 earlier. The KL Property Index or KLPRP has appreciated 7-8% vs a flat performance for the FBM KLCI since the re-opening of economy in early September. The sector is currently trading at an around 64% discount to RNAV from 68% in late August.

We stick to our preference for fundamentally strong affordable housing township developer. Matrix Concepts remains our stock pick.

Figure 8: Previous and new RPGT regime

Source: Ministry of Finance, RHB

Loong Kok Wen, CFA +603 9280 8861
loong.kok.wen@rhbgroup.com

Raja Nur Aqilah Raja Ali +603 9280 8885
raja.nur.aqilah@rhbgroup.com

Telecommunications: Nothing out of the ordinary – NEUTRAL

Aside from a reaffirmation of the broader initiatives tied to the Jalinan Digital Negara or JENDELA project and MyDigital blueprint, the notable Budget 2022 goodies for the sector include the tax exemption extension of up to MYR2,500 for the purchase of smartphones, tablets, and personal computers/notebooks to end Dec 2022. Tertiary students within B40 households will also be given a tablet each under the Peranti Siswa Keluarga Malaysia initiative via an allocation of MYR450m with a further commitment of MYR65m from the telcos. This will benefit 600,000 students. There was no indication if the daily 1GB complementary data offer – for productivity tools – by the telcos will be extended, although this can still be made known later.

Overall, we see Budget 2022 having a mildly positive impact on the sector, given that there is already a slew of government-led initiatives in place – ie the Pakej Peranti Keluarga Malaysia and Pakej Remaja Keluarga Malaysia – on top of attractive handset offers in the market. The telcos are not spared the one-off special tax of 33% for taxable incomes of above MYR100m, with a 10-12% impact on proforma FY22F core earnings based on our estimates. We maintain our NEUTRAL sector weighting with fixed line players Telekom Malaysia and OCK Group as our preferred picks. Downside risks are competition, weakerthan-expected earnings, and regulatory setbacks.

Jeffrey Tan, +603 9280 8863
jeffrey.tan@rhbgroup.com

Plantation: Double whammy for East Malaysian planters – UNDERWEIGHT

The Government has made some changes to the windfall tax applicable to plantation companies. Firstly, they increased the windfall tax threshold for West Malaysia from MYR2,500 to MYR3,000 per tonne and for East Malaysia from MYR3,000 to MYR3,500 per tonne. Secondly, they increased the rates in East Malaysia to 3% for FFB from 1.5%, which is an increase to 15% for CPO from 7.5%. No change was made to the rate applied in West Malaysia, which is at 15%.

Negative for companies with significant landbank in East Malaysia. The impact to companies with more landbank in East Malaysia would be negative, while the impact to companies with more landbank in West Malaysia would be positive. In West Malaysia, planters would pay MYR75.00 per tonne less tax at every price point. However, in East Malaysia, when CPO prices are above MYR4,000 per tonne, the impact of the higher tax rates will be negative.

Geographical breakdown important. Companies with significant landbank in East Malaysia include Sarawak Oil Palms (100%), Ta Ann (100%), IOI Corp (59%), FGV (39%) and Genting Plantations (29%). Companies with significant landbank in West Malaysia include FGV (59%) and Sime Darby Plantation (38%).

Worst case impact of Cukai Makmur is 7-15% to net profit. In addition to the windfall tax changes, the Government is also proposing a new one-off tax called “Cukai Makmur” where companies with taxable income up to the first MYR100m will be subject to income tax at the rate of 24% – the remaining taxable income is subject to income tax at a rate of 33% for the Year of Assessment 2022. While there is no real clarity yet as to how this tax will be calculated, especially for those companies with overseas operations, we have calculated the worst case and best case scenarios for the stocks under our coverage. Under the worst case scenario, we have assumed the tax is applicable on group PBT, resulting in a net profit impact of 7-15% for the stocks under our coverage. Under the best case scenario, we have assumed the tax is only applicable on the PBT of the Malaysian operations, resulting in a net profit impact of 1-10% for the stocks under our coverage. We highlight that the best case scenario is also a conservative one, as it would largely depend on how each company is structured, and whether each subsidiary earns more than MYR100m each.

Maintain UNDERWEIGHT on the sector – double whammy for pure East Malaysian planters. We may need to review our earnings for the pure East Malaysian planters, given the double-whammy impact of higher windfall taxes and elevated corporate taxes on earnings. Nevertheless, this will be partially offset by the higher CPO prices realised due to the lack of Indonesian exposure.

Hoe Lee Leng +603 9280 8860
hoe.lee.leng@rhbgroup.com

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longerterm outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

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None of RHB Securities (Thailand) PCL’s staff or associated person serve as a director or board member* of the subject company(ies) covered in this report
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