SG Budget 2016 - RHB Invest 2016-03-28: As expected an Uninspiring (aka Budget for SMEs)

SG Budget 2016 - RHB 2016-03-28: As expected an Uninspiring (aka Budget for SMEs)

As expected an Uninspiring FY16 Singapore Budget (aka Budget for SMEs)… 

 No blockbuster scheme

  • No blockbuster scheme announced given that it's the first budget by the govt at the start of a new term of office. 
  • As expected, stronger firepower may have been held back in anticipation of the upcoming recommendations from the Committee on the Future Economy (CFE) in end-16.

 Expansionary fiscal stance to address cyclical weakness: 

  • Total FY16 fiscal spending is expected to be SGD73.43bn, SGD5bn (+7.3% YoY) higher than FY15, supported by increases in both Operating Revenue and higher net investment returns (NIR) contributions (Temasek added). 
  • The increases in spending are mainly in healthcare, education, security and urban development. Government expects an overall budget surplus of SGD3.4bn (0.8% of GDP) in this first year of term. 

 Existing Property cooling measures will remain; 

  • it was reiterated that it is still premature to relax any measures. Islandwide prices have only fallen 8.4% from the peak. 
  • We expect the government to continue monitoring the residential market, and relaxation is likely only nearer end-2016 after: 
    1. property prices corrected 12-15% from its peak, and 
    2. QC extension charges and ABSD remission start to bite more developers. 
  • Preferred Property Picks: City Development (BUY, TP: SGD9.22), Ho Bee Land (BUY, TP: SGD2.60), Oxley Holdings (BUY, TP: SGD0.91) 

 The Budget remained focused on increasing productivity as the government stays on course regarding the tightening of foreign labour. 

  • This could continue to curtail expansionary plans of foreign labour reliant sectors, especially the retail / hospitality (services) and construction sectors, which saw levy rates hike and will have to continue to utilise technology/prefabrication etc. to boost their productivity. 
  • Construction players such as Isoteam, Centurion Corp and retail names such as Dairy Farm, Breadtalk, CapitaLand Mall Trust, Frasers Centrepoint Trust, Starhill Global REIT and hospitality landlords/operators such as OUEHT, CDLHT may see some near-term cost pressures starting 1 Jul 2016. 
  • The levy increases for work permit holders in the Marine and Process sectors will be deferred for one year till 1 Jul 2017. Beneficiaries thus incl. Keppel Corp (BUY; TP: 8.08), SCI (BUY, TP: SGD4.00) etc. 

Jurong Innovation District. 

  • The government has also proposed a new precinct in the North-Western part of the island that embodies the ‘live, work, play, learn and create’ concept. The first phase of the district, which will be in Jurong West (area around Nanyang Technological University), is expected to be completed by around 2022. 
  • It aims to be the industrial park of the future where it ties up manufacturing, academia and research in one location. The champion agency to develop this is likely JTC. 
  • Longer-term wise, we believe some of these assets could be acquired by the industrial REIT, in particular AREIT (BUY, TP: SGD2.63). 

 Enhancement to Revitalisation of Shops scheme ....

  • better support promotional activities and upgrading projects in HDB town centres and neighbourhood centres. This enhanced initiative is expected to cost SGD15m annually. 
  • While its impact may not be that significant, it is likely to draw some crowds away from malls in particular retail REITs with suburban presence: CapitaLand Mall Trust (BUY, TP: SGD2.37), Frasers Centrepoint Trust (BUY, TP: SGD2.22) 

 A high proportion of the Budget was allocated to aid the growth of Small Medium Enterprises (SMEs). 

  • One key allocation will be made towards the SGD4.5 bn Industry Transformation Programme which aims to support the industries and innovation. 
  • Overarching schemes include: 
    • Higher Corporate Income Tax Rebate, from 30 per cent of tax payable to 50 per cent of tax payable, with a cap of SGD20,000 rebate each year for the Years of Assessment 2016 and 2017. 
    • National Robotics Programme over the next three years over SGD450m in healthcare, construction, manufacturing and logistics sector. Automation Support Package to provide support of over SGD400m over the next three years. 
    • Over SGD300m to the Food Manufacturing sector over the next five years. Potential beneficiary: Neo Group (BUY, TP: SGD0.82) 

 Letdowns: 

  • No tax-incentives were made available to encourage the development of internally generated, unique Singapore brands. 
  • None of the govt spending is arguably going towards counter-recession measures like those seen in 2009. The immediate issues facing companies such as cost competitiveness, a drop in demand, drying up of credit and availability of manpower, seem to have been ignored. 
  • The SGD300k SME Working Capital Loan scheme deemed not effective because the 50 per cent risk-sharing provided by the Government may not be attractive enough for banks. A minimum of 75 per cent sharing would have been more attractive and may work. 
  • Rolling back the Productivity and Innovation Credit Scheme (PIC) also seems to indicate that the Government is giving up on the PIC as a tool to help productivity improvements. 
  • There is repeated emphasis on robotics, but the level of adoption remains to be seen and even so, the potential displacement of labour is something that this Budget should have addressed, especially with job creation currently low. 

 Downside Risk: 

  • Govt may have underestimated the real dire situation and high costs faced by SMEs and even large MNCs, by thinking that the economy is not in such a bad shape yet and advices not to be overly pessimistic. 
  • May be too little and too late when it eventually decides to step in, and this may have detrimental effect on its ability to root companies in SG.

Ong Kian Lin RHB Invest | 2016-03-28
RHB Invest SGX Stock