Budget Malaysia 2018: Pockets Of Gratification



Budget Malaysia 2018: Pockets Of Gratification

Clear Budget 2018 winners include ExcelForce (NR, alternative trading platform), Gamuda (BUY, MRT3) and potentially MRCB (EDL).

The ambitious Budget 2018 is the most robust in years (+6.5% in operating expenditure) and prudently targets a lower deficit (2.8%). Although largely market neutral as that in previous years, a few companies appear to be prominent beneficiaries. We introduce an indicative end-18 FBMKLCI target of 1,830. Key investment themes are exporters and mega infrastructure. Top Budget winners include Excel Force (NR), Gamuda (BUY) and MRCB (HOLD).

WHAT’S NEW

 The ambitious and populist Budget 2018 is the most robust in years. Federal expenditure will rise 5.5% while the fiscal deficit will drop to 2.8% from 3.0%. However, achieving a 6.5% revenue growth target could be challenging, given that: a) 1H17 revenue has reached only 44% of Budget 2017’s original target (curiously, 2017 revenue target appeared to have been raised by 2.7% in the just-released 2017/18 Economic Report), b) Petronas’ 2018 dividend to the government (7% of the original Budget 17 revenue target) may be dampened by the expiry of a quarter of its LNG exports to Japan in Mar 18 and hence, which would presumably be renewed at significantly lower (market- driven) prices, and c) 2018 would have presumably less one-off benefits from the Inland Revenue’s overdrive against errant taxpayers.

 Prominent measures include a) introduction of an alternative trading platform for the capital market, subject to regulatory approval, b) elimination of toll for the Eastern Dispersal Link (EDL) in Johor Baru, and c) various revelations on mega infrastructure projects, including the fast-tracking of MRT3. Meanwhile, other notable measures include a 2ppt reduction in the personal income tax band of RM20,000-70,000.

 Mega infrastructure projects still in the limelight. Although Budget 2018’s allocation for net development expenditure is flat at RM45.4b, the Prime Minister revealed that: a) 5 of 35 packages of Sabah Pan Borneo Highway project have been awarded, with another 12 undergoing the tender process, b) fast-tracking of the completion of MRT3 to year 2025 (from 2027), c) construction works of the East Coast Rail Link to start in Jan 18, and d) abolishment of the EDL (Johor) toll.
budget 2018 top picks

budget 2018 top picks

 Construction and building material companies continue to be our focus beneficiaries. A total of RM46b has been allocated for development expenditure (+0.2% yoy). The government reiterated the development of the next mega project, ECRL, in which construction should start in Jan 18. Also, it announced the earlier-than-expected completion target of MRT3 to 2025 (from 2027), which would bring forward contract awards to 2019 (from 2020). Other mega projects to be rolled out in 2018 include the Sabah portion of the Pan Borneo Expressway (RM13b) and the Central Spine Road (CSR, RM230m). Key beneficiaries for these projects include Gabungan AQRS, Gamuda, IJM Corporation, Sunway Construction, WCT, MRCB and WZ Satu (for CSR),

ACTION
 We maintain our end-17 FBMKLCI target at 1,770, implying 15.6x 2018F PE, and introduce our indicative end-18 target of 1,830, which assumes a smaller premium to historical mean PE (+0.5SD vs 2017’s +0.7SD).

 Themes and top picks. Market conditions still favour selected mid-caps. We continue to like mega infrastructure and (broadly) exporters. Top picks are Gamuda, Hong Leong Bank and Tenaga for large-caps, Ann Joo, Choo Bee, Ekovest, Gabungan AQRS , Globetronics , Hume Industries , Yong Tai and VS Industry . Genting Malaysia has also softened to attractive levels for longe- term investors. Clear Budget 2018 winners include ExcelForce (NR, alternative trading platform), Gamuda (BUY, MRT3) and potentially MRCB (EDL). Conversely, sentiment in Bursa (HOLD) will weaken as the alternative trading platform would compete against Bursa.



source: UOBKayHian – 30/10/2017