Budget 2014 a watershed moment: CIMB Research

Published: Monday September 23, 2013 MYT 5:21:00 PM 

Updated: Monday September 23, 2013 MYT 5:26:15 PM

KUALA LUMPUR: Malaysia has reached a turning point and needs to show that it is ready to embark on bold fiscal reform and economic restructuring in the Budget 2014 proposals to be unveiled on Oct 25, starting with a move to rein in the budget deficit,CIMB Economics Research says.

It says on Monday the country’s fiscal challenge comes amid the risk of sovereign rating downgrades and investors' focus on the vulnerabilities of the domestic and external sectors at a time when foreign capital is flowing out.

It says Prime Minister-cum-Finance Minister Datuk Seri Najib Razak is tasked with making some necessarily tough decisions to reassure investors that the government had the political resolve to address the country’s fiscal issues.

“There are differing expectations on the budget but the reality is that the government needs to plan its operating and capital spending within its financial capacity,” CIMB Research stresses.

It adds that Malaysia is facing a number of domestic and external challenges, which require the fine-tuning of its macro-economic policy mix for growth and macro-economic stability over the medium term.

“Domestic tail risks include a slowing economic growth momentum, persistent fiscal and rising debt situation, a narrowing of the current account surplus of the balance of payments (BOP), as well as rising operating cost for companies and cost of living for households.

“External tail risks emanate from the recent sharp volatility in equity, bond and foreign exchange markets, no thanks to capital reversals due to the Fed's potential tapering of easy money and monetary stimulus,” explains CIMB Research.

It says among the things the Government needs to do is 1) embark on fiscal reform, by drawing up a timeline for rolling out the GST, making gradual subsidy rationalisation, and ensuring it spent within its means; 2) sustain private investment momentum, through corporate tax cuts and incentives for industries, 3) ensuring a sustainable external balance, by controlling public project, especially those with high import content.

It adds that property cooling measures and affordable housing initiatives are also required, and urged the Government to double floor price of properties purchased by foreigners to RM1mil.

Last but not least, CIMB Research says, there is a need to strengthen social safety net of low and middle-income households.

“The government has maintained its 2013 fiscal deficit target of 4% of GDP (-4.5% of GDP in 2012), -3% in 2015 and a balanced budget by 2020. We think this year's budget deficit target of 4% of GDP is still attainable, given the favourable revenue outcome. In the first half of this year, the actual budget deficit stood at 4.1% of GDP.

“We expect the government to target a fiscal deficit ratio of 3.5% of GDP for 2014,” CIMB Research says.

GST critical to increase revenue, reduce budget deficit — Analysts

Posted on September 23, 2013, Monday

KUCHING: It is critical for the government to increase its revenue to reduce its budget deficit, especially given the country’s narrow tax base from registered companies and labour force.

The implementation of Goods and Services Tax (GST), expected to be announced during Budget 2014 in October, is expected to reduce Malaysia’s operating expenditure (OE) and use the savings to offset a reduction in revenue caused by a cut in income tax rates, if it materialises.

In a briefing to economists, the Ministry of Finance (MoF) said the impact of the GST will likely be positive on economic growth, but with slightly higher inflation and increased debt burden on the consumers.

The ministry expected a 0.3 percentage point positive impact on overall gross domestic product (GDP) growth based on a five per cent GST.

RHB Research Institute Sdn Bhd’s (RHB Research) research team viewed that the narrow tax base (with only 11 per cent of registered companies and 14.8 per cent labour force, paying taxes), coupled with the dependence on oil revenue, which accounted for 32.6 per cent of total revenue in 2012, makes it difficult for the government to manoeuvre.

“Already, it limits the government’s ability to cut corporate and individual income taxes to make Malaysia more attractive to investors and retain talent.

“In addition, the high dependency on oil revenue makes the government vulnerable to the fluctuation of international crude oil prices, which is beyond its control.

“A sudden and significant drop in crude oil prices will likely strain the fiscal position dramatically. This is an area of concern raised by Fitch Ratings Agency when it downgraded Malaysia’s sovereign rating outlook in July.

“In 2009, the government also experienced a sharp drop in the crude oil price by 38 per cent and oil revenue accounted for close to 40 per cent of its revenue then.

“However, it managed to cushion the impact via the change of base year of the tax on petroleum income from preceding year to current year in 2010 and fortunately the crude oil price only fell briefly before it bounced back subsequently in 2010,” it explained.

Nonetheless, the government may not have the luxury, if it happens again.

As such, the government will likely announce the date to implement the GST in the 2014 Budget with indications which suggest that the GST will likely be implemented in 2015 and at a rate of around four to five per cent.

“We understand that at four per cent GST, it will be revenue neutral to the government, as the current five to 10 per cent sales and six per cent service tax (SST) will be replaced by the GST,” the research firm commented.

It noted, the government had collected a total of RM15.1 billion of revenue from the SST in 2012, of which RM9.5 billion came from the sales tax and RM5.6 billion from the service tax. However, the government has promised to look into the possibility of cutting personal and corporate income taxes upon the implementation of the GST and there is also a need to provide cash rebates to the non-tax payers.

The implementation of the GST could potentially take three years to stabilise before the government could look to increase the rate in subsequent years. This implies that the government has to reduce its OE and use the savings to offset reduction in revenue caused by a cut in income tax rates to begin the GST at four per cent.

Meanwhile, RHB Research noted that under the GST, the supply of goods and services will likely be categorised into three groups, that are standard-rated, zero-rated and exempted groups. It added, based on a preliminary proposal and computations, about 71 per cent of the 944 items in the consumer price index (CPI) basket will be standard-rated, 23 per cent zero-rated and six per cent GST tax-exempt.

This compares with 47 per cent of the items under the SST. The overall impact on CPI is 0.4 percentage point based on four per cent GST and 1.17 percentage points based on five per cent GST.

Read more: http://www.theborneopost.com/2013/09/23/gst-critical-to-increase-revenue-reduce-budget-deficit-analysts/#ixzz2ffn9jyFJ

CIMB Research maintains Neutral on Malaysia’s auto sector

Published: Monday September 23, 2013 MYT 8:35:00 AM
Updated: Monday September 23, 2013 MYT 8:37:32 AM

KUALA LUMPUR: CIMB Equities Research is maintaining its Neutral outlook on Malaysia automobile sector.

It said on Monday that UMW’s dominance of the sector continues but recent results show how hard it is to sustain earnings growth without diversification.

As for DRB-Hicom, it said the group continues to struggle with Proton, leaving Tan Chong as its only Outperform and top pick in the sector.

“As expected, August’s sales normalised after the pent-up demand and pre-Hari Raya sales jump in July. Total vehicle sales came in at 51,823 units, down 25% on-month and down 1.4% on-year. The total figure for 2013 as of Aug is 432,953 units, up 5% year-to-date,” it said.

CIMB Research said the segmental market share trends continued unabated, with non-national sales continuing to take market share from the national segment; Proton continued to lose share to Perodua and Nissan, while Toyota continued to lose share to Honda.

“We make no changes to our 0% growth forecast or 630,000 units for the full year. Although YTD growth is currently 5%, we expect 4Q13’s on-year sales growth to be affected by base effects following the exceptionally strong 4Q12 due to pent-up demand after the September 2012 Budget and easy credit.

“We do not expect a strong finish this year. Excise duties will not be cut and other austerity measures expected in the Budget (to be announced on Oct 28) could affect sentiment, in addition to a tightening credit environment.

“Expectations of a GST introduction to replace the 10% sales tax in the Budget could cut a few percentage points off car prices but not enough to change our view of market saturation. Stay invested in Tan Chong which will stand out as a prime beneficiary of the weaker yen and a strong new model line-up,” it said.

Censof holding an ace in its pack

Published: Saturday September 21, 2013 MYT 12:00:00 AM 

Updated: Saturday September 21, 2013 MYT 7:29:34 AM

ALTHOUGH quite a different animal from the other IT stocks on Bursa Malaysia,Censof Holdings Bhd often draws comparisons with MyEG Services Bhd andPrestariang Bhd, both of whom, like Censof, get most of their business from the Government.

Here is where they diverge: MyEG and Prestariang have leapt considerably ahead of the pack, with their shares returning 144% and 98% on a one-year basis, respectively, compared to Censof’s 30%.

But Datuk Samsul Husin doesn’t need to thumb his nose at the competition. Indeed, with Time Engineering Bhd in the fold, Censof’s fortunes are about to change.

“We expect one plus one to make three,” the firm’s group managing director tellsStarBizWeek.

Censof finally sealed the deal last week with Khazanah Nasional Bhd to buy the state-owned investor’s entire 45.03% stake in Time Engineering for 20 sen a share, or RM69.8mil cash, beating nine bidders, including MyEG and the privately-held Skali Group.

This isn’t the first acquisition for low-profile Censof, but it is by far the biggest and the first involving another listed entity – what more one as storied as Time Engineering.

Samsul declines to go into specifics, but he says Censof isn’t looking to overhaul Time Engineering’s management, outside of board representation and its choice of chief executive.

Khazanah, he notes, already has a roadmap in place for Time Engineering. What’s left is the implementation, Samsul says without elaborating on the details of the plan.

While he assures that Censof and Time Engineering will remain as separate listed companies, Samsul does not rule out a merger down the road, if the opportunity presents itself.

Big step, big risks

Time Engineering’s financials over the past five years have been erratic, with its profit swinging from a loss in 2008 before turning profitable and then slipping back into the red last year.

But look under the hood and things don’t look that grim, Samsul says. Its results in the first half of the year saw a 10.4% boost to the topline, while net earnings went from red to black. The firm’s after-tax margins also rose to 13.2% from just 3.4% against last year.

For Censof, which has a market capitalisation of around RM170mil, analysts say better days are in store for the software-as-a-service provider.

M&A Securities has a target price of 85 sen for the stock, while Kenanga Researchpegs it at 88 sen with an upgrade to “outperform”.

According to forecasts by Kenanga Research, Censof could post a net profit of RM22.2mil in 2014, assuming an RM7.3mil contribution from Time Engineering, despite potential write downs for the latter’s two loss-making units.

Censof’s calling card is its status as a preferred financial management software solutions (FMSS) supplier to the Government. Besides Censof, only one other player,Konsortium Jaya Sdn Bhd, is recognised by the state for the provision of FMSS services that are Standard Accounting for Government Agency-compliant.

Some key contracts held by Censof are the outcome-based budgeting system, valued at RM22.5mil for five years, awarded by the Finance Ministry and used in Budget 2013. It also has jobs with Perkeso and the Inland Revenue Board worth RM33.08mil and RM5.6mil.

Now that Time Engineering is on board, analysts see Censof bundling its services and offering both front and back-end solutions, enabling it to tap a larger pool of clients and raise the barrier of entry, thus fending off would-be rivals.

“Censof currently offers both back-end products and services such as financial management solutions, e-payment gateway services and investment/asset management solutions to its customers whereas Time Engineering offers front-end services such as Database-as-a-Service to its customers,” Kenanga Research says in a note to investors.

“One of Dagang Net Technologies Sdn Bhd’s shortcomings is its lack of a payment engine that is directly connected to the banks. The proposed acquisition would allow Censof’s T-Melmax system to add to the portal run by Dagang Net and to complement and enhance its service with T-Melmax’s payment gateway thus providing a more comprehensive service to its clients.

“We understand that Censof is planning to bundle its financial management solutions and e-payment gateway services with Dagang Net’s myTRADELINK portal. The move could provide a complete trade solution ranging from the front-end (myTRADELINK portal) to back-end services (financial management solutions and e-payment gateway services), which will further raise the entry barrier for new entrants.”

Dagang Net, a 71.25% subsidiary of Time Engineering, is the firm’s most valuable asset because of a 25-year concession it holds with the Customs Department that conducts more than 50 million electronic transactions a year worth RM1.8bil.

Time Engineering draws 70% of its profit from Dagang Net. It has a virtual monopoly to process Customs-related transactions, duty payments and electronic document transfers between the trading community, such as banks, forwarders, customers and port operators, serving a customer base of 13,000.

The concession, which helps Dagang Net maintain a healthy pre-tax margin of 30%, has been cited as Time Engineering’s biggest attraction and the reason for its many suitors.

However, taking over Dagang Net also poses a huge risk: its concession expires next September. On this Samsul is quite confident of a renewal, pointing to the high barrier of entry for such work, the lack of clear-cut competitors and Censof’s own track record with the Government.

Herculean task ahead

Still, no guarantees were given when Censof bought Time Engineering that an extension was in the bag, Samsul says.

In the meantime, Censof has surfaced as the favourite to clinch a sizeable contract from the Government to provide GST-related software services nationwide, as reported by StarBizWeek last month.

Four bidders are vying for the project, including My EG and Brilliance Information Sdn Bhd.

“The mandatory implementation of GST means that Censof will have to adjust the accounting system of its clients, creating a new source of revenue for Censof,” M&A Securities says.

“In addition, thanks to its direct role in proving the accounting services for the Government and Government-related agencies, we opine that Censof will emerge as one of the big winners of Budget 2014.”

On its international operations, Samsul is visibly chuffed by Censof’s progress in Indonesia, where it is enjoying higher margins as a result of the lower cost base there.

The company sells its wealth and asset management software in Indonesia to mainly private clients, such as big banks. Although it has sales offices in multiple countries, its foreign units account for no more than 10% of group profit.

Be that as it may, Samsul thinks the numbers put out by analysts are conservative, and he expects Censof’s profit to grow 30% following the Time Engineering purchase.

Even if Time Engineering turns out to be the toughest assignment of his career, Samsul claims he isn’t losing any sleep. Censof, he stresses, hasn’t reported a loss since it started out in 1997, and he intends to keep it that way.

Pemaju boleh tuntut semula cukai dikenakan

Publication: HM

Date of publication: Sep 21, 2013

Section heading: Main Section

Page number: 061

Kuala Lumpur: Pelaksanaan Cukai Barang dan Perkhidmatan (GST) tidak seharusnya memberi kesan kepada harga hartanah khususnya projek kediaman kerana pemaju dan kontraktor boleh membuat tuntutan semula kepada kerajaan setiap cukai yang dikenakan.

Ketua Ekonomi Kumpulan RAM Holdings Bhd Dr Yeah Kim Leng berkata, harga kediaman yang ditawarkan sepatutnya berada pada tahap neutral atau tiada peningkatan selepas GST dilaksanakan kerana pemaju berpeluang menjimatkan kos.

"Walaupun mereka dikenakan cukai untuk barangan lain, namun mereka boleh menuntut semula cukai yang dikenakan itu tidak sepatutnya pertambahan kos itu diletakkan ke atas bahu pembeli," katanya.

Menurutnya, sekiranya GST dilaksanakan, ia juga memberi ruang kepada pemaju dan kontraktor untuk menjimatkan kos secara keseluruhan kerana setiap yang dikenakan cukai boleh didapatkan semula.

"Sepatutnya, tidak timbul peningkatan harga kediaman kerana pemaju dan kontraktor dapat menjimatkan kos berikutan barangan digunakan walaupun dikenakan cukai, namun mereka masih boleh mendapatkannya semula.

"Sekiranya kos pembinaan dijimatkan, maka tiada peningkatan harga kediaman sepatutnya berlaku atau sekurang-kurangnya ia berada pada tahap neutral sebagaimana sebelum GST dilaksanakan," katanya ketika dihubungi Bisnes Metro di sini.

Is BN ready for GST? - Joe Taxpayer

SEPTEMBER 21, 2013

I refer to the letter by Veerinderjeet Singh - "Goods & Services Tax, is it time? "

Dr Veerinderjeet, perhaps a more pertinent question to ask is, "Is the BN government ready for GST"?

Sure, the Customs Department would have you believe that they are ready; but if you have had any experience in trying to obtain a tax refund from them and various other dealings, then you may think otherwise.

But that is not my question; I am asking if THE BN government is ready. The main purpose of GST is to ensure a wider and fairer method of tax revenue collection. In Singapore it is very successful because the government ensures that the bulk of GST collected goes towards enhancing the life of its lower income group, for eg by refurbishing their HDB flats.

Knowing the propensity of our BN chaps for wastage, corruption, inefficiency and mismanagement, do you really have confidence that our GST revenue would be managed with a prudent and transparent mindset?

Do we have any confidence that we are no longer going to hear of cows and condos, RM56k binoculars or submarine commissions? What about "I help you, you help me"? 

I doubt it because the prime minister is already fulfilling his "I help you, you help me" promise by rewarding his voter base, having prepared a big billion ringgit goody bag for them recently; who said Janji ditepati is mere sloganeering? Not when it's "I help you, you help me" time!

What is the point of collecting GST when the government continues to subsidize inefficient, wastage and resource hogging industries (think Proton)? What is the point when the government subsidies inefficient allocation of resources via privatization for the benefit of cronies (think the IPP contracts)? What is the point of collecting GST when we already taxed heavily by BN's love affair with the other form of "indirect tax" - corruption?

You listed the infra-structure that is necessary to operate in a GST environment; but, as our previous PM stated, we have world class infra with third world mindset in maintenance, and without exception, this extends to many of our jabatan kerajaan.

Try calling their service center hotline. It took the LHDN many years to achieve a certain service level (though still far from satisfactory, considering that they are so "efficient" when it comes to tax penalties!); does the Custom have the luxury of time to ensure a competent roll out and upkeep of the program?

Here's my conclusion; until we have a clean and efficient government at Putrajaya, GST is otherwise going to add to our social sorrows; it will, as you say 'ultimately affect the man on the street', because, the BN government is not known for the 'need to tread carefully' where Joe Public is concerned. – September 21, 2013.

* The writer reads The Malaysian Insider.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.