Budget 2017 - DBS Research 2017-02-20: Expansionary budget, targeted approach

Budget 2017 - DBS Vickers 2017-02-20: Expansionary budget, targeted approach Singapore Budget 2017 Market Outlook Industry Sector Impact

Budget 2017 - Expansionary budget, targeted approach

  • Short term support to overcome challenges during economic transition while pursuing medium term plans to create new opportunities.
  • Singapore equities’ outperformance sustained by GDP growth and earnings upgrade.
  • Raising STI Year-End target to 3250, but expect near term breather.
  • Growth stocks back in focus: UOB, Genting Singapore, First Resources, Bumitama, SGX, Sheng Siong and Thai Beverage. ST Engg is our key ‘Smart nation’ proxy.

Help to overcome near term challenges, pave way for medium term growth. 

  • An expansionary budget, yet prudent will steer Singapore through this economic transition, as it lays the groundwork for medium term growth with $2.4 b set aside to pursue recommendations laid by CFE committee. 
  • With the S$600m in International Partnership Fund to co-invest with Singapore companies to expand globally, this could spur more M&A deals.

Impact on sectors 

Construction Sector – Neutral (Alfie Yeo) 

  • Infrastructure projects will be accelerated in the construction sector. S$700m worth of public sector infrastructure projects will be brought forward to start in FY2017 and FY2018. These include the upgrading of community clubs and sports facilities under the Sports-In-Precinct Programme. 
  • In addition, the S$150m Public Sector Construction Productivity Fund will be established to allow government agencies tendering for construction projects to procure more innovative and productive solution, albeit as a more expensive alternative.
  • Enhanced connectivity was also reiterated with the planned construction of Changi Airport Terminal 5, the Kuala LumpurSingapore High Speed Rail, the Tuas Terminal and the doubling up of MRT network by 2030. There is no relief in foreign worker levy of any sorts to encourage continued productivity improvement in the sector.

S$700m is small, at 1-1.25% of overall construction demand.

  • The reprieve in the construction sector comes only in the form of bringing forward S$700m of public infrastructure projects over the next two years. At S$350m per year, this represents only 1-1.25% of Building and Construction Authority’s (BCA) 2017 total construction demand forecast of S$28-35bn. There is no relief in foreign worker levy which also means that construction firms need to contend with higher labour costs.
  • The net impact is marginal for the sector’s topline but yet foreign worker levies and additional costs needed for automation and increased productivity remain within the sector. Even with a slightly better construction demand, local construction firms have to compete for projects with more credible international contractors from Japan, China, Korea, Europe etc.
  • Pan-United (HOLD) as a key beneficiary to Singapore’s construction play due to its market leadership and exposure to public infrastructure projects. However, competition has driven down ready-mixed concrete (RMC) prices, which has affected revenue growth and margins for is Concrete & Cement segment in FY15 and FY16. BCA has also forecasted soft RMC demand for FY17 in view of lower on-site building activities.
  • We will turn positive on Pan-United when the pricing and volume outlook for RMC improve. Other SGX-listed players with ready-mix concrete operations include Hong Leong Asia and Lian Beng (Not rated).

Land Transport – Neutral (Andy Sim) 

  • The introduction of volume-based duty of S$0.10/litre of diesel will increase the cost of taxi drivers. To offset the increase, there will be a permanent reduction S$850/year on Special tax on diesel taxis, which will bring the Special tax down to S$4,250/year (or S$2,125/ 6 months). We estimate this will translate into an estimated cost savings of S$14.3m/year for Comfort Delgro (CD).
  • The reduction in Special Tax will translate into savings of about S$2.30/ day for each taxi, and we believe that ComfortDelGro/ CityCab will pass on such cost savings to taxi drivers, likely in the form of lower rental rates. In return, this will offset the increase in the introduction of volume based diesel duty mentioned above. Overall, the impact should offset each other, and should be a neutral impact on Comfort Delgro.
  • With the introduction of diesel duties, this could influence taxi drivers’ behavior towards more fuel saving driving techniques, coupled with shift towards preference call bookings.
  • That said, CD has recently introduced hybrid petrol-electric cars and there are currently about 250 Toyota Prius on the roads.
  • The strategy is to progressively introduce such models, over diesel-powered taxis. Overall, we expect the impact on Comfort Delgro to be muted.
  • We maintain our BUY recommendation on Comfort Delgro with a TP of S$2.94. While market skepticism could linger for a while on the threat from private-car hailing companies, we believe the continued delivery of steady operating performance by the group will vindicate our view.

CFE beneficiaries 

  • Beneficiaries of the government’s push to pursue the strategies outlined in CFE costing S$2.4b, will benefit ST Engineering, which is at the forefront in developing ‘Smart city’ technologies and projects. 
  • It is well-positioned to tap on the explosive growth of Smart City adoption in the years to come, and we are seeing increased traction in terms of take-up of its products.

Offshore & Marine Sector – Neutral (Ho Pei Hwa) 

  • More help needed for offshore and marine Foreign work Levy increases deferred another year. In view of the cyclical weakness, the foreign worker levy hikes in the marine sector will be deferred by one more year till end Jun 2018. This brings about cost savings of S$50 and S$100 per basic tier R1 and R2 worker respectively, which levies stay at current S$300 and S$400 respectively. 
  • We estimate that the move could save Keppel O&M and Sembcorp Marine S$3-5m respectively in 2017-2018. While this might not be a very significant amount, every bit helps given the challenging operating environment and plunge in profitability.

Enhancing the Internationalisation Finance Scheme (IFS).

  • The government announced that it intends to enhance the Internationalisation Finance Scheme that is currently in place under IE Singapore. It will catalyse financing for projects undertaken by larger firms in high-risk developing markets, by providing a share of the sovereign risk insurance coverage.
  • Specifics have not been released as yet (more details to be announced by the Ministers for Trade and Industry at the COS). However, as we have mentioned in our November 2016 report (“Every bit helps, but more needed”), the required use of funds under the IFS for purchase of fixed assets, project financing and M&A financing is of little use to struggling offshore service players who are still focusing on balance sheet repair. What these players would appreciate more is higher Bridging Loan amounts (which can be used for working capital), though such increases were not announced alongside this budget.

Changes to Utilities services – marginally negative for Keppel Infrastructure Trust, SembCorp Industries 

  • The government has proposed to raise water charges by 30% in two phases from July 2017. 
  • Higher water costs are unlikely to impact Keppel Infrastructure Trust, as its SingSpring and Ulu Pandan assets generate revenue based on availability – in other words, simply by ensuring that the minimum capacity of water is available to the offtaker (NEA). 
  • Variable input costs are also passed through to the offtaker.

Implementing carbon tax from 2019; Potentially translates to 0.55-1.1 sct increase in electricity tariff. 

  • Government aims to implement the carbon tax between S$10-20 per tonne of greenhouse gases emission from 2019. The tax will generally be applied on upstream, for instance, the power stations and other large direct emitters, rather than electricity users. This is expected to create a price signal to incentivise industries to reduce their emissions. 
  • The impact of the carbon tax on most businesses and households should be modest.

Based on US Energy Information Administration (EIA), gas-fired power emits 0.55 kg of CO2 per kWh. 

  • For power plants, taking Sembcorp Industries’ 1.2GW capacity in Singapore as an example, carbon tax payable could total S$40-80m per annum, which likely to be passed on to consumers. Assuming full cost pass-through, consumers might see 0.55-1.1 Sct tariff hike based on carbon tax rate of S$10-20 per tonne. This represents a small 2.5-5.0% increase from current average household tariff.
  • Higher carbon taxes may impact Keppel Infrastructure Trust but we believe that these should also be passed on to the offtaker in due course, that being a similar treatment to other variable costs across the KIT assets in Singapore. It’s hard to quantify the potential carbon tax as KIT’s carbon emissions are not disclosed.

Property Sector – Neutral (Derek Tan) 

  • No relaxation of cooling measures. As expected, the government did not relax the property tightening measures in this budget. 
  • While this may be disappointing to some, we do not expect share prices in the property sector to be overly depressed as the recent rise in property share prices were driven by 
    1. cheap valuation of the sector, 
    2. increase in volume sale of new units 
    3. rising interests from Hong Kong and China buyers for Singapore properties and 
    4. M&A activities spurring excitement in the market.

Help for new couples to own their first home.

  • Instead, the government has raised CPF housing grants in this budget, in line with its policy to assist young couples to afford their first home. This will spur activity in the property resale market. Currently, first-timer couples will get a grant of S$50,000 for couples who buy resale flats that are 4-room or smaller, and S$40,000 for couples who buy resale flats that are 5-room or larger. This is up from S$40,000 and S$30,000 respectively.
  • Together with the Additional CPF Housing Grant and Proximity Housing Grant, a couple can now receive a total of up to S$110,000 in housing grants when buying a resale flat, subject to location, size and income.

Positive impact to volumes in both resale and private property market.

  • In recent times, we have increasingly seen couples prefer to purchase their first home in mature estates that are near their parents and thus could be attracted to purchase a resale home given increased monetary incentives to do. As such, HDB volumes could pick-up over 2017 and we believe that prices should remain fairly stable or increase modestly.
  • As a result, we see spill-over effect to the mass-market condominium volumes and prices in the medium term as aspiring HDB upgraders could look to upgrade their homes.

Janice CHUA DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-02-20