Note: The article has been amended to reflect the changes made by CIMB Securities to its report.
KUALA LUMPUR (June 10): The expanded sales and services tax (SST) effective July 1 is expected to negatively impact the consumer sector due to increased operating costs, while its effect on sectors like construction, finance and healthcare is expected to be limited, said analysts.
CIMB Securities, in a note on Tuesday, said the implementation of the expanded SST might lead to erosion in discretionary spending due to higher prices for non-essential goods and the broader range of taxed services.
“Given the most subdued consumer sentiment, we believe that consumer companies could also potentially face margin pressure, as consumer companies might absorb part of the cost increases in order to ensure affordability for consumers.”
Meanwhile, demand for staples as well as essential goods and services that are exempted from the expanded taxes should remain relatively resilient.
As consumers are likely to prioritise essential spending over discretionary purchases, the shift in spending pattern will likely benefit food and beverage manufacturers and retailers whose product mixes are skewed towards daily necessities.
CIMB said it continues to advocate focusing on companies benefitting from inelastic demand for daily necessities, and those well-positioned to capture consumer downtrading trends by targeting the mass-market segment.
The house maintained its “neutral” call on the sector, which is trading at nearly 27 times one year forward PE (price/earnings).
Even so, CIMB said the valuations were “fair at this juncture”, reflecting ongoing soft consumer sentiment and impact of boycott on selected consumer brands.
Its top picks include 99 Speed Mart Holdings Bhd (KL:99SMART), Farm Fresh Bhd (KL:FFB), and Padini Holdings Bhd (KL:PADINI).
Within the sector, it has “buy” calls on MR DIY Group (M) Bhd (KL:MRDIY) , Mynews Holdings Bhd (KL:MYNEWS), Fraser & Neave Holdings Bhd (KL:F&N) and Aeon Co (M) Bhd (KL:AEON).
Limited impact on other sectors
Meanwhile, Hong Leong Investment Bank (HLIB), in a separate note said the expanded SST is seen as a non-event for the market, with limited impact on other sectors’ profits.
HLIB said the construction sector is well-insulated, considering that most contract structures allow for cost pass-through, while banking demand remains largely inelastic, and healthcare providers retain a strong regional pricing advantage.
Meanwhile, the house expects the impact on inflation to be limited, given the targeted nature of the SST adjustments, which primarily apply to non-essential items typically consumed by higher-income households. It cited the Ministry of Finance’s (MOF) consumer price index (CPI) forecast within the range of 2.0%-3.5%.
The MOF has announced that the implementation of the expanded SST will take effect on July 1, 2025. Under the revised framework, a sales tax of 5% to 10% will be applied to selected non-essential items.
Concurrently, the service tax (6% or 8%) will be broadened to cover additional service categories, including rental or leasing, construction, financial services, private healthcare, private education, and beauty services.
At noon break on Tuesday, 99 Speed Mart was up nine sen or 4.3% at RM2.19, Farm Fresh was up five sen or 2.8% at RM1.86, and Padini was unchanged at RM2.12.
Meanwhile, MR DIY was up three sen or 1.9% at RM1.64, Mynews was unchanged at 57 sen, F&N was up six sen or 0.2% at RM27.58, and Aeon was up two sen or 1.5% at RM1.40.