Singapore Strategy - UOB Kay Hian 2016-03-28: 2016 Budget ~ A Tilt Back To Businesses

Singapore Strategy Singapore Budget 2016

Singapore Strategy: 2016 Budget – A Tilt Back To Businesses

As expected, the focus of 2016 Budget is tilted towards businesses, particularly SMEs, given the lacklustre economic outlook.
We see limited equity market impact from the Budget and would position selectively upon market pull-backs.

Unsurprisingly, this is a prudent Budget with a projected mild budget surplus of 0.8% of GDP, compared with a deficit of 1.2% of GDP in Budget 2015.
In 2016, government spending is projected to rise 7.3% yoy, with the increases mainly in healthcare, education, security and urban development.

Despite widespread calls for a reduction in the foreign worker levy (FWL), the government remains committed to reduce dependence on foreign labour and raising productivity.
Only the offshore & marine and process sectors will enjoy a freeze on higher FWL while the other sectors will have to bear an 18% rise in 2016.

MAINTAIN OVERWEIGHT on property and REITs. We see minimal impact on the property and REIT sectors. The status quo on the easing of property cooling measures came as no surprise. The launch of the Jurong Innovation District should prove beneficial to CapitaLand Mall Trust, with its Westgate, JCube and IMM malls located there. This should also serve as a conduit for Genting Singapore’s Genting Hotel Jurong. Maintain OVERWEIGHT on both sectors, and we prefer diversified, deeply-valued developers and REITs. Top BUYs: City Developments, Wing Tai, ART, KREIT and MLT.
The government clarified that the relaxation of the cooling measures is still premature, in line with recent statements made, with the drop in property prices (9% from 2013’s peak) still not at alarming levels. We believe the government would be looking into unwinding cooling measures once the 15% threshold is breached.
Jurong Innovation District: Industrial park of the future. The Jurong Innovation District will create an environment to house learning, research, innovation and production activities within a single, next-generation industrial district. The first phase is targeted for completion around 2022. JTC’s current project, Launchpad @ JID, will serve as a space for entrepreneurs, researchers and students to design, prototype and test-bed their new innovations, and is slated for completion in 2017.

Offshore: Boost in FWL will be deferred for a year. The FWL for R2 workers in the offshore marine sector will remain at S$400 per month for 2016. Originally, the levy were to be boosted to S$500 per month from 1 Jul 16, translating into savings of S$1,200 per worker per year. The deferment will help alleviate operating cost pressures for offshore marine firms although this will more likely benefit SMEs only.
Large caps to see negligible benefits from deferment. We expect the S$100 savings per worker derived from this deferment to be muted for large caps. Based on Sembcorp Marine’s (SMM) 2015 annual report, about 7,353 (66%) of its 11,142 strong workforce in Singapore are non-local. Assuming all are levied at R2 rates, this translates into savings of about S$8.8m, or 1.7% of SMM’s 2015 S$527m employment cost. While Keppel’s employment figures are not readily available, we expect a similar level of impact as SMM’s. As a reference, Keppel’s 2015 staff costs were S$354m.

The government continues to support growth at SMEs by introducing SME Working Capital Loan Scheme. The government will co-share 50% of the default risk for loans of up to S$300,000 per SME. The scheme will be available for three years and the government expects loans of S$2b to be disbursed over this period.
The SME Mezzanine Growth Fund will be expanded from S$100m to S$150m. M&A allowance will be increased from S$20m to S$40m.
Overall, Budget 2016 has minimal impact on banks.

There are no major surprises as the focus of the Budget is tilted towards more support for businesses, particularly SMEs, in the face of the current downturn. Another area of focus is innovation and R&D, which are necessary to move Singapore from “value added” to “value creation”. We see little market impact from the Budget.
After the recent 12.6% bounce from ytd low, the FSSTI is trading at 1.18x P/B (or a 26% discount to long-term mean), which is comparable to levels during SARS (P/B: 1.08x) and 911 (P/B: 1.20x) but still above that during the Asian financial crisis (P/B: 0.70x) and the global financial crisis (P/B: 0.87x). Based on a blended average P/B and PE and assuming a 10-20% discount to the long-term mean as a fair valuation, we estimate a year-end fair value of 2,740-3,080 for the FSSTI. Given limited upside, we advocate stock picking and defensive positions and would look to buy on weakness with a bias for yield stocks.
Our key picks are DBS, OCBC, SingTel, City Dev, K-REIT, SingPost, MLT and Bumitama.
Mid-cap picks include Valuetronics and Innovalues.
We have SELLs on SMM, SIA Engineering and Super Group.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-28