Singapore Strategy - CIMB Research 2017-02-20: Cleaner global digitalised city

SGinvestors.io

Singapore Market Strategy Singapore Budget 2017 SINGAPORE TECH ENGINEERING LTD S63.SI VENTURE CORPORATION LIMITED V03.SI COMFORTDELGRO CORPORATION LTD C52.SI

Singapore Strategy - Cleaner global digitalised city

• No drastic carrots or sticks in the 2017 Budget. Digital and innovation remain the two catch phrases, similar to the CFE report – Pioneers of the next generation.
• Focus is still to help SMEs and households, rather than large enterprises.
• Budget surplus of S$1.9bn (0.4% of GDP). No reprieve for property as cooling measures remain but with higher grant for HDB buyers.

No reduction in corporate tax but higher rebates and GST voucher

• The Corporate Income Tax (CIT) Rebate remains at 50% of tax payable but on a higher cap of S$25k (from S$20k) for YA2017. The CIT rebate will also be extended to YA18 at a reduced rate of 20% of tax payable, capped at S$10k. We believe this would help SMEs to deal with the rising business costs, and not the large enterprises.
• One-off GST Voucher – a special cash payment of up to S$200 for eligible Singaporeans, bringing the total cash rebate to S$500 for 2017. This may spur one-off retail spending and have a slight positive impact on the ailing retail industry, in our view. 
• Our pick in the retail sector remains Frasers Centrepoint Trust.

Deferring foreign worker levy not much help to O&M sector

• The government again deferred the foreign worker levy in the Marine and Process sectors by one more year. It was deferred by one year in 2016. 
• The yards are already struggling with an order drought and have been right-sizing and mothballing yards. Therefore, the deferment of levy may not move the needle, in our view.

Diesel tax by consumption, carbon tax by 2019, higher water prices

• A S$0.10 per litre of diesel tax will be levied on automotive diesel. Simultaneously, the special tax on diesel cars and taxis will be permanently reduced by S$100 and S$850, respectively. 
• We estimate taxi drivers’ annual cost to increase by a net of S$500 (assuming 100% of the special tax is passed through to the drivers). This is a slight disadvantage for the highly competitive taxi market, in our opinion.

Carbon tax of S$10-20/tonne of greenhouse emission will be implemented from 2019.

• The tax will generally be applied to power stations and other large direct emitters, rather than electricity users. We see little impact on Singapore power plants as most are fueled by natural gas.
• Water prices will also be increased by 30% in two phases, starting 1 Jul 2017. We do not see a significant impact on Sembcorp Industries’ water segment (24% of Singapore utilities earnings) given that prices for industrial treated water generally have a pass-through mechanism, but may be subject to a time lag.

Property: no easing of cooling measures but more grants

• Government housing grant for first-time couples will be raised to S$50k from S$30k for resale HDB flats (for 4-room or smaller) and to S$40k (for 5-room or larger).
• We believe the higher grant for first-time applicants buying resale HDB flats may attract some buyers of BTO flats or marginally increase the relative attractiveness of HDB resale flats vis-a-vis mass market private properties. This could divert some demand from this segment of the market.
• However, we think the change would only have a very slight impact on the private residential market as the grant would also depend on households’ income brackets.
• Households with a monthly income of greater than S$12,000 (or S$18,000 for extended families) are not eligible for this scheme.

Sector picks and implication

• There is no stark difference between the 2017 and 2016 budgets in terms of helping the industries: 
  1. some shield for banking NPLs (SMEs and stretched households); 
  2. property measures remain; and
  3. continued relief in foreign worker levy for the O&M sector. 
• Our top picks remain the exporters which are cash rich – STE and Venture.

Highlighted companies 

ST Engineering 

• ADD, TP S$3.82, S$3.62 close 
• STE’s electronics division is a leader in ICT and cyber security. We expect the division to keep its strong order momentum in 2017 with S$2.5bn of contracts. Our TP is based on blended valuations (P/E, DCF and dividend yield).

Venture Corporation 

• ADD, TP S$10.94, S$10.12 close 
• Medtech, life sciences and 3D printing are the new opportunities that Venture is pursuing.
• Test & Measurement segment has grown from 28% of revenue in 1Q13 to 44% of revenue in 3Q16. Our TP is based on 14.4x FY18F.

ComfortDelgro 

• ADD, TP S$2.91, S$2.42 close 
• CD has a diversified business model.
• Earnings growth benefit comes from the reformed bus contracting model and rolling out of Down Town Line stage III. More overseas M&As are a key re-rating catalyst. Our TP is based on DCF (WACC: 7%, LTG: 1.5%).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-20

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.820 Same 3.820

ADD Maintain ADD 10.940 Same 10.940

ADD Maintain ADD 2.910 Same 2.910