You are on page 1of 7

BIMB SECURITIES RESEARCH

STRATEGY
PP16795/03/2011(029282)

10th October 2011

Budget 2012
Generosity to the core!
Budget 2012 can be deemed a generous one primarily focused on the welfare of the less privileged, the aged and the civil servants. Nonetheless, there will be those that may be somewhat disappointed with the absence of tax cuts and incentives to improve the disposable income of the middle income group. There were no extraordinary surprises as this Budget continues to concentrate on the construction sector plus private consumption as the main engine to propel the nations economic growth amid prevailing externalities. Interestingly, sin taxes were left untouched and should make some fractions really happy. All said, we are NEUTRAL on the Budget as we embraced it with an open mind.

Better than expected. GDP growth estimates of 5-5.5% for 2011 and 5-6% for 2012 surely must have surprised many amid prevailing uncertainties. To achieve these, the construction sector and private consumption are placed on the limelight again. As for the budget deficit, it is expected to fall marginally to 5.4% in 2011 from 5.6% in 2010. For 2012, the deficit is expected to improve to 4.7%. Retailers to reap the benefits. Incentives and bonuses to the lower income groups and civil servants are catalysts to inflate private consumption. We expect retailers to enjoy the windfall as the propensity to spend by these groups may increase. We reckon consumer related stocks like Nestle, The Store, Padini, Cheetah, KFC, Hai-O, QSR to name a few would reap the benefits. Constructing the nation. The construction sector again is earmarked to spearhead the nations economic growth from the roll-out of high impact projects under RP2 from an allocation of RM98.4bn for 2012/13. This is in addition to those under the ETP essentially to achieve the projected growth of 7% for 2012. Felda listing finally on. The long awaited listing of Felda is slated for by 1H2012. We believe this to have positive impact on Bursa Malaysia from addition of another megacap on the local bourse. We have conducted some preliminary estimates that Felda being the largest oil palm planters in the world is destined to be a FBMKLCI constituent and based on our assumptions, Felda may add another RM30-RM40bn to the benchmark index. Property sector unscathed? We do not envisage the increase in RPGT of 10% from 5% previously to have any major damage on the property sector. On the flip side, we see the maximum level under My First Home Scheme to RM400,000 from RM220,000 to have positive impact on properties in this segment. Existing tax incentive for REITs is extended by an additional 5 years until 31 Dec 2016. Nonetheless, we are not overly positive on the property sector at the moment. Kenny Yee kenny.yee@bimbsec.com.my 03-2691 1251 and The Research Team Maintaining Islamic stature. To further encourage sukuk issuance, tax deduction on expenses incurred for sukuk wakala will be given for a 3-year period commencing 2012. Meanwhile income tax exemption given for non-ringgit sukuk issuance is extended for another 3 years until 2014.

10 October 2011

th

STRATEGY: Budget 2012

ECONOMICS Ambitious but not impossible


Headline Economic Figures
Growth (%) Real GDP Agriculture Mining and Quarrying Manufacturing Construction Services GDP @ 2000 prices
Source: MoF

2010 7.2 2.1 0.2 11.4 5.1 6.8 RM559.55bn

2011e 5.0-5.5 4.7 -2.4 4.5 3.4 6.4 RM588.37bn

2012f 5.0-6.0 4.1 2.5 4.5 7.0 6.5 RM620.51bn

Construction - a key growth catalyst. Strong forecast for the construction sector in 2012 underpin by implementation of the Second Rolling Plan (RP2) from allocation of RM98,4bn. On top of this, another RM978m is set aside to accelerate the development in 5 regional corridors. Large infrastructure projects supporting 2012 growth would be (i) Sungai Buloh-Kajang MY Rapid Transit (MRT) line, (ii) integrated transport terminal (IIT) in Gombak, (iii) the development of Sabah Gas and Oil terminal, including the 300MW Gas-Fired Power Plant, (iv) on-going construction of KLIA2, (v) expansion of clean water supply and electrification projects in rural areas especially in Sabah and Sarawak as well as construction of 430.7km rural roads, (vi) ongoing corridor developments like the Lido Boulevard and LEGOLAND in Iskandar, Johor and (vii) upgrading of the existing coastal roads in East Coast Economic Region (ECER) Private consumption, another important growth catalyst. On the demand side, growth in private consumption is expected to be broad based with a strong expansion of 7.1% in 2012. This is premised on (i) steady consumer confidence, (ii) stable employment outlook, (iii) higher household income, and (iv) improved civil servant remuneration. Burgeoning debts. As at end-June 2011, national debt was up RM241.7bn from RM227.1bn in 2010. Nonetheless, the ratio to GDP has actually declined to 28.5% from 29.6% in 2010. Meanwhile, the Federal Government debt has increased at a faster rate to RM455.7bn from RM407.1bn in 2010. As a result, the Federal Government debt ratio to GDP has risen to 53.8% from 53.1% before. As part of fiscal rules rigorously observed, the Federal Government will ensure that this ratio will not exceed 55% of GDP. Federal Government Finance
2010 159,653 151,633 8,020 51,296 -43,275 -5.6 RMm 2011 183,375 180,283 3,091 48,603 -45,511 -5.4 2012 186,906 181,584 5,322 48,343 -43,360 -4.7 2010 0.6 -3.5 4.7 Change (%) 2011 2012 14.9 1.9 18.9 0.7 -5.2 -0.5

Revenue Operating expenditure Current account balance Development expenditure Overall balance % of GDP
Source: MoF

High 2011 budget deficit from surge in operating expenditure: Despite the surge in revenue, the 2011 budget deficit is estimated at 5.4% relatively unchanged from 5.6% in 2010 principally due to the surge in operating expenditure, up 18.9%yoy to RM180.3bn. Nonetheless, the figure is an improvement from 7% in 2009. The strong growth in revenue for 2011 to RM183.4bn (+14.9%) was driven by higher tax revenue collection, up 22% to RM96.5bn.

www.bimbsec.com.my

|2

10 October 2011

th

STRATEGY: Budget 2012

2012 budget deficit expected to fall to 4.7%. This is mainly from slower operating expenditure (+0.7%) and development expenditure (-0.5%) on the back of better revenue growth of 1.9% to almost RM187bn.

RETAIL SECTOR - Welfare for the Rakyat, expect higher consumer spending
Incentives, bonuses & increments. The 2012 budget provides many goodies as additional allowance provided for the poor and salary adjustment for civil servant will have a positive impact on the retail sector. We believe most will spend on consumer goods and services as the marginal propensity to save amongst the lower income group is generally lower. Hence, companies to benefit from this would be Nestle, The Store, Padini, Cheetah, KFC, Hai-O, QSR to name a few.
Description The abolition of primary and secondary school expenses. Salary increment for civil servants through a single tier structure with additional increments to enable civil servants to continue receiving annual increments over a longer period. Annual increment of civil servants will be increased between RM80 and RM320 according to the grade. In addition, civil servants who opt to accept the SBPA will receive an annual increment between 7% and 13%. Annual pension increment of 2% without having to wait for any review of the remuneration system or salary adjustments. One-off payment of RM3,000 to members of the special constable and auxiliary police who served in protecting the country during the emergency era. Each house costing RM65,000 will be sold for RM45,000 and the Government will subsidise RM20,000. For this, the Government will allocate RM200m under the Rumah Mesra Rakyat (RMR) programme. One-off cash assistances of RM500 to households with a monthly income of RM3,000 and below. A total of 3.4m or 53% of total households are expected to benefit from this assistance. Schooling assistance of RM100 to all primary and secondary students from Year 1 to Form 5 nationwide. As this assistance is targeted to low- and middle-income groups, families who can afford may opt not to receive it. Book voucher worth RM200 to all Malaysian students in public and private local institutions of higher learning, matriculation as well as Form 6 students nationwide. Impact Household savings of RM150m Increase in disposable income

Increase in disposable income

Increase in disposable income.

Extra disposable income of RM186m into the economy.

Significant saving in the monthly instalment, hence higher disposable income.

Total household savings totalling to RM1.8bn.

This measure will reduce schooling expenses and is expected to benefit 5.3m students which result in total households savings of RM530m. This assistance is expected to benefit 1.3m students will result household savings of RM260m

www.bimbsec.com.my

|3

10 October 2011

th

STRATEGY: Budget 2012

CONSTRUCTION Leading the nations growth


A darling sector. Amid the uncertainties on Global growth, it is therefore only natural to concentrate on sectors that we can at least rely on, to spearhead the nations economic growth. The construction sector having received a fair chunk of the Budgets attention, is again called upon by the government to realize the ambitious 7% growth for the sector for 2012. RP2 roll out. Most importantly, several big infrastructure projects under the RP2 are set to take off in 2012/2013 amounting to RM49.2bil pa. The Second Rolling Plan (RP2) is part of the 10 MP would see projects like (i) Lebuhraya Pantai Barat, (ii) Gemas-Johor Bahru double tracking rail and (iii) redevelopment of Sungai Besi Air Base implemented. The sector is also reaping the benefits from the governments additional allocation on several small to mid size initiatives namely the rural road programme, water and electric supply. This feel good allocation is on top of the other existing and potential projects (refer to tables below) thus providing the sector with extra buoyancy. Nevertheless, we hope to see prompt project implementation as sentiments on the sector has been frustrated by the delay in awarding projects previously announced.

Summary of projects announced during Budget 2012:Project Gemas-Johor Bahru Double Track, Lebuhraya Pantai Timur, Lebuhraya Pantai Barat, Lebuhraya Pantai Barat, Lebuhraya Central Spine, Kota Marudu-Ranau road Rural Road Programme and Village-Link Road Project Clean water supply initiative Provision of electricity supply Hospital Kuala Lumpur upgrade Construction, improvement and maintenance of schools Flood Mitigation Plan Construction, improvement and maintenance of schools Five regional corridors infrastructure works 1,800 2,100 1,100 300 1,000 1,000 1,000 978 Value (RM'm)

Other projects not mentioned during Budget 2012:Project Kota Kinabalu Water Supply Scheme Langat 2 Water Supply Scheme Janamanjung Coal-fired Plant (1000MW) SCORE Road Projects Mengkuang Dam Sg Buloh Damansara MRT NKVE/NSE Fourth lane expansion Ampang Line (Package B) Kelana Line (Package B) New LCCT Terminal Tanjung Manis port extension Kelau Dam Sibu Airport expansion Value (RMm) 2,800 2,400 2,300 2,000 1,200 11,700 1,100 883 805 400 350 200 150 Gamuda, WCT, IJM, Fajarbaru HSL Loh & Loh IJM, Gamuda, TRC, Muhibbah Contractor/Potential contractor WCT Gamuda/Loh & Loh, WCT, Jaks, KDE Mudajaya, Zelan HSL, Sarawak contractors Chinese contractors Gamuda-MMC JV, IJM, UEM, WCT, MRCB, Loh & Loh, Fajarbaru, Scomi IJM, UEM

www.bimbsec.com.my

|4

10 October 2011

th

STRATEGY: Budget 2012

LISTING OF FELDA A potential catalyst to the local bourse


A mega-cap in the making. Felda Global Ventures Holdings is slated for listing on Bursa Malaysia by mid-2012, creating another mega-cap blue chip plantation company on the local bourse. A brief background. At present, Felda Global Ventures Holdings S/B is a wholly-owned subsidiary of the Federal Land Development Authority (FELDA). It was incorporated in 2007 and holds a 49% equity stake in Felda Holdings Bhd. The remaining equity stake is owned by Koperasi Permodalan Felda.

Source: Company website

Biggest in the world. Felda Holdings is largest plantation operator in the world with landbank in excess of 880,000 hectares. In 2009, the Group produced approximately 7.66m tonnes of fresh fruit bunch (FFB), which is more than the combine production of IOI Corp and Kuala Lumpur Kepong. It is amongst the worlds largest palm oil producers accounting for approximately 8% of world palm oil production with 2009 revenue of RM11.8bn. Feldas Historical Financial Performance
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Dec-05 Source: Company website Dec-06 Dec-07 Revenue Dec-08 Pretax Margin Dec-09 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00%

www.bimbsec.com.my

|5

10 October 2011

th

STRATEGY: Budget 2012

The Group has recorded a cumulative annual growth rate (CAGR) of 13.2% since 2005. By applying a similar growth rate, we estimate that the Group is able to achieve a record revenue of RM17.2bn by FY2012. Assuming that Felda Holdings managed to improve its pretax margin to a more competitive level, we envisaged the Groups valuation may achieve between RM30RM40bn by 2012 and is destined to being a constituent of the benchmark FBMKLCI.

www.bimbsec.com.my

|6

10 October 2011

th

STRATEGY: Budget 2012

DEFINITION OF RATINGS BIMB Securities uses the following rating system: STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months OUTPERFORM The stock is expected to perform ahead of the market in the next 12 months TRADING BUY The stock is expected to outperform the market in the next 3 months NEUTRAL The stock is expected to perform in line with the market in the next 12 months TRADING SELL The stock is expected to under perform the market in the next 3 months SELL An expected price depreciation of more than 10% in the next 12 months SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Tingkat 1&2, Blok Podium, Bangunan AMDB No. 1 Jalan Lumut, 50400 Kuala Lumpur Tel: 03-4043 3533 Fax: 03-4041 2622, 4041 3433, & 4041 4159 http://www.bimbsec.com.my

www.bimbsec.com.my

|7