1 November 2021
By Ishika Mookerjee and Yantoultra Ngui
(Bloomberg) — (Updates ringgit performance; adds Affin
Hwang comment.)
Malaysia’s stock benchmark slumped as much as 2.2%, the
most in seven months, after the country unveiled a budget Friday. There will be a negative impact on earnings from a “surprise” one-time windfall tax and a higher stamp duty rate, analysts said, with some lowering their targets for the KLCI index.
* The country introduced a one-off “prosperity” tax of 33% on any company income after 100 million ringgit
* Stock gauge down for an eighth day, set for its longest run of losses since February 2020; it fell 0.3% Friday after the budget’s announcement
* NOTE: Malaysia Unveils Biggest Budget to Spur Post-Covid Recovery
* The ringgit is down slightly against the dollar at 4.1467 per dollar from 4.1403 per dollar on Friday
Here’s what strategists are saying about the budget’s impact on equities:
TA Securities
* Cuts end-2021 KLCI index target by 3.4% to 1,630 points on the tax and higher stamp duty, “which came as unpleasant surprises,” analyst Kaladher Govindan writes in a note
* New tax can shave 2022 earnings of KLCI’s stocks by about 11%
* Tenaga Nasional, Petronas Gas, Public Bank and Hartalega Holdings to be among the most-hit component stocks
CGS-CIMB Securities
* Windfall tax and higher stamp duty rate “more than offset” the benefits for property, auto and plantation sectors, analyst Ivy Ng writes in a note
* In the worst case, this could lower KLCI index members’ earnings by 4.4 billion ringgit or 6.6%; cuts end-2021 KLCI target by 108 points to 1,521
* Banks, brewers, tobacco, utilities, gloves, telco, auto, palm oil and technology players will be impacted by this tax, while firms with most of their earnings coming from foreign subsidiaries will be least impacted
Citigroup
* Prosperity tax could cause a ~ 12% negative impact to CY22E’s earnings for the stocks under coverage, analysts including Megat Fais write in a note
* With the tax, KLCI’s 4% earnings growth expected in 2022 “could be derailed”
* Automotive, property, consumer, gloves, planters are relative winners, whereas property names already rallied hard ahead of the budget; the lack of mention of new mega-projects could weigh on the construction space
Fortress Capital Asset Management
* “Losers could be companies which have previously made windfall profits such as gloves,” said investment director Chua Zhu Lian
* Retail spending is expected to pick up given the continuation of generous subsidy programs, so “clear winners” would be F&B, apparel, commercial malls, retail chains and grocery
* Companies in the medical sector are also expected to do well, especially those with core businesses in distribution of vaccines, medical equipment, healthcare products and services as well as substitutes to unhealthy products
MIDF Research
* The prosperity tax may result in a 11% drop in the aggregate forecast earnings of KLCI members in 2022
* “While admitting that it would only be a one-off, we still expect negative market reaction to the special tax,” brokerage says
* MIDF cuts its KLCI end-2021 target to 1,650 points from 1,700 points
* Even so, the market may resume its upward trajectory once the prosperity tax has been priced in, brokerage says
Affin Hwang Asset Management
* “This 37% spike in tax rate effectively wipes out most of the already modest 5%-10% earnings growth of 2022,” Gan Eng Peng, senior director of equities, writes in a note
* The broader market might correct 1%-3% in the near-term, potentially wiping off 20-50 billion ringgit in value
* The hardest hit sectors will be the banks, telcos, utilities, large oil & gas players, gloves and plantation companies