Singapore Budget 2016 - Maybank Kim Eng 2016-03-28: Chin up, it’s not so bad

SGinvestors.io

Singapore Budget 2016

Singapore Budget 2016 - Chin up, it’s not so bad

1. Counter-cyclical measures: Industrial SREITs to benefit but transport could disappoint 

1.1 Total spending to rise by 7.3%, SMEs to benefit 

• The SGD5b rise in spending will be supported by increased operating revenues and Temasek being included in the Net Investment Return framework. Between higher expenditure and additional measures, the positive fiscal impulse to the economy works out to c.1% GDP. 
  • Public infrastructure in education, health, security, and urban development characterized the increase. Of total expenditure, more than SGD2.5b will be for projects below SGD100m. 
  • Corporate Income Tax Rebate raised from 30% to 50% capped at SGD20k. - Special employment credit: wage offsets for workers aged 55 and above earning more than SGD4k to be extended to 2019. 
  • SME Working Capital Loan assistance: co -share 50% default risk of up to SGD300k per SME, is expected to catalyze SGD2b in loans. 
  • Foreign worker levy increases deferred and kept the same for the O&M and Manufacturing sector s . 

1.2 Immediate positive for Industrial SREITs 

• The counter -cyclical measures are clearly targeted to tide over SMEs in terms of easing cost pressures, increasing profitability, and bolstering liquidity. This could in turn stave off SMEs on the margin s from folding. 
• In terms of our stock coverage Industrial SREITs: AREIT (HOLD, TP SGD2.23), MINT (BUY, TP SGD1.71) are the immediate beneficiaries . Most of AREIT’s and MINT’s tenant s are reckoned to be SMEs. Each have 1,410 and 2000 tenants respectively, while top 10 tenants are only 18.8% and 17.2% of rents. AAREIT (BUY, TP SGD1.47) and CACHE (HOLD, TP SGD0.93) have 155 and 37 tenants respectively, while top 10 tenants are 58% and 76 % of rents. 
• Our top pick for the sub-sector is MINT . 

1.3 Participating banks to co -share certain SME risks with government 

• Corporates’ access to credit against this adverse economic landscape has been impeded. Moreover, firmer SIBOR/SOR and expansion in risk premium have translated to higher cost of funds. The government’s proposal to work with participating financial institutions to extend up to SGD300,000 per SME should be constructive. 
• The SME Working Capital Loan Scheme allows the bank to co -share default risk with the government but loan approval would still be subject to the risk review of the participating financial institutions. We see this as a win for SMEs and for Singapore banks. We will further address this point together with the Automation Support Package later . 

1.4 No removal of property cooling measures 

• The Minister reiterated that property cooling measures “are intended to keep the market stable and sustainable. Based on the price level and current market conditions, our assessment is that it is premature to relax these measures. We will continue to monitor developments in the property market closely.” From this, we infer that it is in the government’s opinion that prices are elevated and not sustainable. They are also comfortable with the quality of the banks’ mortgage book. 
• Further downside should be expected before any lifting is made. This is in line with our view that there is not enough pain in the market yet and cooling measures may only be reviewed in early 2017. 
• Also, if the economy deteriorates more than expected and takes prices down with it, we see lifting of the measures as a first in line potential policy stimulus tool. 

1.5 Offshore & Marine: put a band-aid on it 

• In view of the downturn in the offshore and marine sector, the sector has been shedding workers. Many such companies are facing cash/credit crunch or order cancellations or much lower pricing. 
• The deferment of foreign workers’ levy increase for work permit holders by a year will barely scratch the surface of their multi-faceted problems. Instead, for smaller enterprises in this space, the Working Capital Loan Scheme may prove more useful. 
• For the government-linked companies in this space, we expect the government to provide more specific targeted support should the downturn become more prolonged. We believe the government views the offshore and marine sector as strategic to Singapore. 

1.6 A potential disappointment for land transport? 

• Expenditure estimates for the Ministry of Transport revealed that it has a bus procurement budget of SGD652.1m for FY16-18. The total budget for FY15-18 was SGD768.4m of which SGD116.3m was spent in FY15. Of this outstanding SGD652.1m, only SGD224.8m will be spent in FY16. 
• Also, prior to this budget announcement, SBS Transit (Not Rated, 75%- owned by ComfortDelGro) had transferred a procurement contract worth SGD164m for 346 new buses scheduled for delivery in 2016-17 to the LTA on 29 Dec 2015. This implies that excluding the transferred new bus contract from SBS Transit, the LTA only plans to spend SGD488m (SGD652.1m minus SGD164m) for bus purchases over the next three years. 
• This is negative and may weigh on sentiment for SMRT (HOLD, TP 1.40) and ComfortDelGro (HOLD, TP SGD2.80). Recall that the public bus sector is expected to migrate to a new operating model from Sep 2016. Further, the government has highlighted intentions to own all bus assets under the new regime. Hence, market participants expect a windfall for the operators from the sale of their existing bus assets to the government. The disappointment arises because: 
  • The government's bus procurement budget in this transition year is just SGD224.8m. And excluding the announced contract for new buses, total outstanding budget for the next three years is SGD488m compared to the bus assets owned by the operators, which we estimate to be worth SGD1b (SBST: SGD0.8b; SMRT: SGD0.2b). 
  • Worse, the budget could be utilized for the purchase of new buses and may not be confined to buying older buses from the existing operators. 
  • We did not see any budget set aside for the purchase of rail assets from the operators. 

1.7 Dry powder if the business cycle deteriorates 

• An expected surplus of 0.8% of GDP keeps some dry powder. In the Minister’s words, “Should economic conditions turn, we stand ready to adjust and respond.” Total fiscal impulse could potentially therefore be c.1.8%. 

2. Structural supply-side measures 

2.1 SGD4.5b Industry Transformation Programme: Productivity & value creation 

• The new ITP programme continues the work of the 2013 Quality Growth Programme. 
  • Improved access to business grants through a one-stop portal, bypassing the need to deal with multiple agencies. 
  • SGD400m Automation Support Package over three years: grant of up to 50% of project costs could be funded, capped at SGD1m / 100% investment allowance for automation equipment / risk-share loans with financial institutions between 50-70% of automation projects. 
  • Support for scaling up: SME Mezzanine Growth Fund expanded from SGD100m to SGD150m / M&A allowance up to SGD40m deal size / non-taxation of disposal gains on equity investment till 2022. 
  • National Trade Platform: a one-stop information management system to enable electronic data sharing between business and government. Expected to save SGD600m in man-hours a year. 
  • SGD450m National Robotics Programme over three years. 
  • Of the SGD19b Research Innovation Enterprise 2020 plan, up to SGD4b will be directed to industry–research collaboration, with an additional SGD1.5b to the National Research Fund. 
  • Networks: SPRING to partner Trade Associations and Chambers to initiate 30 projects to reach out to 3000 SMESs / SG Innovate: match budding entrepreneurs to mentors, VC, research talent. 
  • Jurong Innovation District: integrate learning, research, innovation and production, a shift from previous production focused industrial estates. 

2.2 Structural positive for SREITs with business parks and high-spec space 

• With a heavy focus on R&D and scaling up enterprises, again AREIT (HOLD, TP 2.23) and MINT (BUY, TP 1.71) are the main beneficiaries. AREIT and MINT are 57.8% and 33% exposed to business park and highspec space – the exact kind of space that value-creation firms would be seeking. MINT’s exposure to these two product types is expected to grow by 8pp to 42% by 2018. 

2.3 Automation support for SMEs 

• The introduction of the Automation Support Package to drive automation efforts will enhance SMEs’ access to funding qualifying projects. In addition, the government will increase its risk-share from 50% to 70% with participating financial institutions under SPRING’s Local Enterprise Finance Scheme (LEFS). 
• As at 1H15, SME loan growth in Singapore decelerated to 8%, vs 13% a year ago. NPL ratios spiked to 1.3% - a level not seen since Dec 2011, reflecting the tougher economic conditions. Proportion of unsecured SME loans declined to 18% from an average of 23-24% from 2010-2014 as banks set stricter lending requirements and become more risk-averse in their credit underwriting standards. 
• Of the 3 Singapore banks, UOB (HOLD, TP SGD16.96) is the largest SME lender, followed by OCBC (SELL, TP SGD7.20) and DBS (SELL, TP SGD12.68). With these measures for the government to co-share default risk and to improve local SMEs’ access to loans, it may help alleviate some concerns on the Singapore banks’ exposure to this segment. 

3. Household measures continue to address structural imbalances & supply side issues 

• Measures announced for households: 
  • Currently cash gifts of SGD8-10k are credited to parents of Singaporean children upon birth. Subsequently co-saving of 1-1 matching from SGD6-18k is available. Under the co-savings scheme, the government will now kickstart the savings with an automatic SGD3k grant. 
  • Housing grants of up to SGD35k for families with children who need a second bite at owning a home. 
  • SGD250m Outward Bound School on Coney Island for schoolchildren. 
  • Increase qualifying income ceiling to SGD2k/mth for Workfare Income Supplement and increase the payout. Budgeted SGD770m/yr. 
  • Broadening wage credit and workfare for those with disabilities. 
  • Broadening the Silver Support Scheme. SGD320m/yr. 
  • One-off GST Vouchers, and service and conservancy rebates to the less well-off. SGD280m and SGD86m. 
• The household budget therefore renews the focus on tackling longstanding structural issues of the lack of births, income inequality, caring for a greying society and the disabled, as well as support for individual self-motivated life-long learning in the SkillsFuture programme.

Joshua Tan Maybank Kim Eng | Derrick Heng Maybank Kim Eng | Gregory Yap Maybank Kim Eng | Yeak Chee Keong Maybank Kim Eng | Ng Li Hiang Maybank Kim Eng | John Cheong Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-28