The government has kept to its commitment of fiscal austerity without sacrificing economic growth when it outlined the 2014 Budget. It is a good budget. The only 0.3 per cent year-on year rise to RM262.2 million in total government spending does not impede progress as the government still projects a healthy gross domestic product expansion of 5.0 per cent to 5.5 per cent next year with strong private-sector participation.
Nonetheless, the rising allocation for operating expenditure vis-à-vis development expenditure is a concern and should be addressed by trimming overlapping agencies. It was at 78.2 per cent of total expenses in 2008 but has risen to 83 per cent next year at the expense of development expenditure. No major surprises in 2014 Budget as measures like the goods and services tax (GST), cut in sugar subsidies and harsh measures to curb property market speculations came within market expectations. Cut in corporate tax and individual income tax should not cause excitement as it was an“after effect” to compensate for the six per cent value added tax.
Telcos will be one of the beneficiaries as they may no longer need to absorb the current six per cent services tax imposed on prepaid subscribers. DiGi and Maxis are the biggest winners in relation to their prepaid contributions. Manufacturers should benefit too. Construction players will benefit from government spending on infrastructure projects. The absence of any drastic subsidy cuts, except for the 34 sen in sugar subsidies, removed the short-term downside pressure on corporate earnings.
However, that does mean the electricity tariff and gas price hikes are off the radar. After much delay, the expected increase in energy prices could finally materialise in 1Q14 as the government addresses the issue once and for all with the implementation of the fuel cost pass through mechanism under the proposed incentive-based regulation tariff framework.
So, if there is any correction in Tenaga Nasional Bhd’s share prices due to the missing link, it should be a buying opportunity. The cut in sugar subsidies will only have a very minor impact on Felda Global Ventures (FGV) as contributions to bottom line from sugar businesses are minimal (impacts on FY13 and FY14 net profits were -1.0 per cent and -1.2 per cent respectively). As such, buy FGV on price weakness.
Share prices of property stocks have already discounted the news and any further weakness should be an opportunity to accumulate as real-estate prices should rise with the onset of GST. The increase in Real Property Gain Tax (RPGT) does not impede purchasing power but merely lowers future profits. Expectations of higher prices will offset lower profits from RPGT but the real impact will only be felt when interest rates rise to a level that would hurt disposable income. We may not see that level until in the later part of 2015. So, make hay while the sun shines
by TA Securities