2019 Singapore Budget - RHB Invest 2019-02-19: Building On Past Budgets

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SINGAPORE TECH ENGINEERING LTD (SGX:S63)

2019 Singapore Budget - Building On Past Budgets

• Singapore Budget 2019 is progressive in nature and builds on the measures and initiatives that have been put in place during the past couple of budgets. It continues to focus on driving business innovation and growth, increasing the productivity of Singapore’s labour force and strengthening the social framework.
• The current budget also recognises the challenges related to overall security and liveability of the country, which is evident from the focus on strengthening the country’s total defence, steps to tackle climate change, and measures to help the low income segment and elderly in terms of healthcare and the cost of living.

Key Takeaways

Focus on driving enterprise growth

1. Enterprise Singapore in partnership with the private and public sectors will launch a Scale-up SG Programme for local firms to build new capabilities, innovate and venture into new markets;
2. New pilot Innovation Agents programme will also allow firms to tap into a pool of experts for advice;
3. Singapore-based SMEs, which are ready to scale up can tap the SME Co-Investment Fund III, which builds on the work of similar earlier funds. The Government has set aside an additional SGD100m for this fund, which is part of the Co-Investment Programme launched in 2010 aimed at catalysing private-sector funding in these SMEs. The new fund is expected to bring in another SGD200m for these firms;
4. Young companies (incorporated less than five years) will also benefit in terms of mitigating risks as the Government will be taking up to 70% of risks for bank loans (compared to existing 50%) – we see this as a minor impetus for loan growth;
5. Focus for SMEs to go digital and technological upgrading is also being emphasised.

Workers training and increasing labour productivity

1. New Professional Conversion Programmes for mid-career workers to enter new areas in block chain, embedded software and prefabrication will be launched;
2. The Career Support Programme to help firms hire mature and retrenched or long-term unemployed workers will be extended for two years;
3. To better manage manpower growth in the services sector, the workforce quota for this sector will be reduced in two steps starting next year. The dependency ratio ceiling (DRC) – a quota setting the maximum number of foreign workers a firm can hire for every full-time local worker it employs – will be lowered progressively to 35% on 1 Jan 2021 from current 40%. The tighter ratio will also place a cap on the number of S Pass holders companies can hire in the next two years – to 10% in 1 Jan 2021 from the current 15%. The DRC will remain unchanged for other sectors, such as construction, process and marine shipyard.
4. To help firms adjust to these foreign workforce policy changes, the Government will extend the enterprise development grant for another three years, till 31 Mar 2023. The grant, which was announced at last year's Budget, provides local enterprises up to 70% government funding to undertake projects for their growth and transformation. The scope of the productivity solutions grant will also be expanded to support up to 70% of the out-of-pocket costs for training;
5. An earlier-announced increase in foreign worker levy rates for the marine shipyard and process sectors has been deferred for another year.

Strengthening social framework

The one-off SGD1.1bn bicentennial cash and rebate:

• Special under the Budget, the Bicentennial Bonus targets the low-and middle-income earners as well as students and the elderly. About 1.4m Singaporeans will get more help with their daily living expenses with a GST cash voucher of up to SGD300, depending on their assessable income and the annual value of their homes.
• Lower-income workers will get cash of an additional 10% of their workfare income supplement payment for work done last year, with a minimum payout of SGD100.
• Middle-income earners will get a 50% personal income tax rebate, capped at SGD200, for the Year of Assessment 2019. For parents with school-going children, a SGD150 top-up will be made to their child's Edusave accounts if they are in primary or secondary schools.
• Singaporeans between the ages of 17-20 will receive a top-up of up to SGD500 in their Post-Secondary Education Accounts, which can be used to support the costs of a child's tertiary education. About 300,000 older Singaporeans, who are mostly women, will also see a top-up of between SGD300- 1,000 in their Central Provident Fund accounts.

Merdeka Generation Package:

• About 500,000 Singaporeans who belong to the nation-building Merdeka Generation will receive a boost to help them stay active in their silver years, and give them better peace of mind over future healthcare costs.
• The Merdeka Generation Package, for those born in the 1950s, is expected to cost the Government more than SGD8bn, with SGD6.1bn being set aside for the package in this year's Budget. Those eligible will be notified by April, and will receive their
• Merdeka Generation cards from June.

Enhancement to healthcare subsidies:

• Lower-to middle-income Singaporeans who are orange Community Health Assist Scheme (Chas) card holders will now be able to get subsidised costs for common illnesses. Previously, they received only subsidies for chronic conditions. Those with complex chronic conditions will also have their subsidies increased. The changes to Chas subsidies will cost the Government more than SGD200m a year;

Long-term care support measures:

• SGD5.1bn will go into a Long-Term Care Support Fund to help Singaporeans with CareShield Life premium subsidies and other forms of long-term care support, such as ElderFund.
• Last year, the Government earmarked SGD2bn for this fund. In this year’s budget another SGD3.1bn will be put aside for this purpose. The cash assistance rates for those under the ComCare Long-Term Assistance scheme, also known as public assistance, will be raised. The scheme provides basic monthly cash assistance to support the living expenses of those who are permanently unable to work and have little family support.

Higher pay-outs for lower-wage, older workers:

• Lower-wage workers are set to receive higher pay-outs under the Workfare Income Supplement (WIS) next year. Aimed at helping them supplement their income and CPF savings, the enhanced WIS will see their maximum annual pay-outs increase by up to SGD400. This means that employees will be able to receive up to SGD4,000 a year in WIS pay-outs, depending on their age and income.
• This measure will take effect from Jan 2020. The qualifying income cap for the programme will also be raised from the current SGD2,000 to SGD2,300 a month. Almost 440,000 Singaporeans stand to benefit from this.

Extension on rebates for service and conservancy charges along with public transport vouchers:

• About 930,000 eligible Housing Board households will receive 1.5- 3.5 months of rebate on their service and conservancy charges for another year. This is expected to cost SGD132m. Households whose members own more than one property are not eligible for the rebate. The Public Transport Fund will also receive a SGD10m boost and continue to help commuters with transport expenses, including public transport vouchers for lower-income families.
• Given the generous pay-outs bonanza with the majority of the population receiving at least some form of perks, it is hard to discredit the rumours of an early election. Singapore must hold its next general election by Apr 2021, but Prime Minister Lee has hinted that it could be as early as this year. The budget itself is being called by the Government as being ‘expansionary’.

Deficit budgeted for FY2019

• The year’s budget spending is estimated to turn into a deficit of SGD3.5bn or 0.7% of GDP, a reversal from the surplus seen in 2018 at SGD2.1bn. This deficit will be funded from fiscal surpluses accumulated over the term of the government, without any need to draw on reserves.
• Excluding the contribution from past reserves and investment arms such as Government of Singapore Investment Corporation and Temasek Holdings, FY19’s fiscal balance would have suffered a larger deficit at SGD7.1bn, a slightly larger amount compared to the estimated FY2018’s SGD7bn.

SECTOR IMPACT

Banks: Continuing push for SME digitisation is long term positive

• Over the past few years, Singapore banks have progressively been digitising their consumer banking operations. The Budget’s continued push for SMEs to adopt digital technology could lead to more SME business banking going digital.
• This is particular so in the areas of digital payments and cash management. These should benefit Singapore banks in respect of lower cost income ratios over the next few years and ultimately contribute to banks recording higher ROEs.
• We remain OVERWEIGHT on Singapore banks on their potential for long-term ROE enhancement. Both DBS GROUP HOLDINGS LTD (SGX:D05) (Target Price: SGD28.80) and UNITED OVERSEAS BANK LTD (SGX:U11) (Target Price: SGD29.80) are rated BUYs.

REITs: REIT hub status with extension of tax concessions for another 5 years.

• Currently S-REITs enjoy the following tax concessions:
  1. tax exemption on distributions received by individuals,
  2. concessionary income tax-rate of 10% for S-REITs distribution received by non-resident non-individual investors, and
  3. tax exemption on qualifying foreign-sourced income.
• The above tax concessions were scheduled to lapse after 31 Mar 2020. But in a widely-anticipated move by the market, the Government announced the extension of tax concessions until 31 Dec 2025. The sunset clause for the tax exemption on S-REITs distributions received by individuals will be removed. Similarly, tax concessions on REIT ETFs were also extended until end-2025.
• The extension of tax concessions will help to strengthen Singapore’s position as Asia’s REIT hub and promote the listing of more overseas REITs. We also expect a more vibrant REIT ETF market with more products being offered which should help boost S-REITs’ trading liquidity.
• We maintain our OVERWEIGHT call on the S-REITs sector. Our top picks are
  • ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) (Target price: SGD2.90),
  • CDL HOSPITALITY TRUSTS (SGX:J85) (Target price: SGD1.80),
  • STARHILL GLOBAL REIT (SGX:P40U) (Target price: SGD0.80) and
  • MANULIFE US REIT (SGX:BTOU) (Target price: USD0.94).

Consumer: Sentiment should remain positive in the near-term

• The Government reiterated that it will raise GST by 2ppts only sometime in the period from 2021-2025. With no near-term GST hike implementation, we expect consumer sentiment – which is witnessing signs of recovery – to continue improving in 2019. Moreover, the cash benefits and rebates announced for middle-to lower-income families, although small in amount, could still support domestic consumer spending.
• The changes in dependency ratio ceiling for the services sector will force the consumer & retail industry to reduce reliance on foreign talent. While it may cause near-term pressure on businesses, we remain optimistic that, in the long term, it will lead to building of deep skillsets and transform staff capabilities to stay resilient as Singapore advances as a node of technology.
• During our recent interaction with KOUFU GROUP LIMITED (SGX:VL6), management confirmed that raising productivity should eventually help to offset current elevated labour costs.
• On the positive front, we expect The Productivity Solutions Grant to lend some financial support in deploying the necessary capex needed to increase automation in the consumer sector. In addition, the extension of Workfare Income Supplement and raising of qualifying income cap from the current SGD2,000 to SGD2,300 from Jan 2020 onwards could lead to small increment in other income and help to offset labour cost pressures.
• We also do not expect the tightened GST import relief for travellers to have any negative impact on domestic consumer sentiment.
• In the consumer sector, our preference remains for grocer retailers over F&B players. We have a BUY rating on SHENG SIONG GROUP LTD (SGX:OV8) (Target Price: SGD1.27).

ST Engineering: To benefit from renewed focus on total defence

• Citing an increasingly uncertain geopolitical environment, the Government has outlined a plan to allocate 30% of its budget spending on defence, security and diplomacy efforts. This will translate into an increase in spending by 4.8% over the previous budget.
• Singapore plans to continue to innovate and build new capacities to meet its security needs. In addition to the existing five pillars of military, civil, economic, social and psychological defence, Singapore has recognised the importance of guarding against cyber threats, as a sixth pillar of digital defence. We view the Government’s increased focus on defence spending as positive for SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering), which remains a key innovator and supplier of defence equipment to the country.

Real Estate: Continued tightening of immigration policy stance a slight negative

• Although no targeted policy measures were announced, the Government maintained its tighter immigration stance and announced a further lowering of foreign worker quotas in the services sector, starting in 2020.
• The foreign population has been on a decline over the last two years after growing at nearly 7% pa in the ten years prior to that. As a result, overall population growth has slowed down to 0.9% pa during 2013-2018, compared to 2.2% pa during 2008-2013. The slower population growth is likely to cap property price appreciation in future and we expect a modest 0-2% increase in Urban Redevelopment Authority’s (URA) private property index for 2019.
• The upcoming URA Master Plan 2019 will give more details on land optimisation plans for the next 10-15 years. We maintain our NEUTRAL rating on the sector with BUY call on APAC REALTY LIMITED (SGX:CLN) (Target Price: SGD0.72).

Transport: Increase in excise duty for diesel to increase business costs, but still long-term positive for public transport

• In order to build a more sustainable environment, the Government plans to raise the current excise duty for diesel by SGD0.10 per litre to SGD0.20 cents per litre with immediate effect. We believe this increase in excise duty on diesel will result in increased costs for businesses and individuals.
• However, the Government will also permanently reduce the annual special tax on diesel taxis by SGD850. The Government assess that if the savings are passed on to taxi drivers, on average, it could reduce the impact of the duty increase by more than three-quarters for taxi drivers. Business Times quoted Tammy Tan, ComfortDelGro’s Group Chief Corporate Communications Officer as saying that the company will be passing on the entire savings resulting from the reduction in the annual special tax for diesel taxis to its drivers.
• The Government will also permanently reduce the special tax on diesel cars by SGD100, which is expected on average to reduce the impact from the higher excise duty by more than half. To help businesses adjust, it will provide a 100% road tax rebate for one year, and a partial road tax rebate for another two years for commercial diesel vehicles. It will also provide additional cash rebates of up to SGD3,200 for diesel-run buses ferrying school children.
• In addition to ensuring that businesses and individuals do not take Singapore’s current green cover for granted, we assess that this measure will also complement Singapore’s efforts to further build and rely on the public transportation infrastructure, which should be positive in the long term for COMFORTDELGRO CORPORATION LTD (SGX:C52) (Target Price: SGD2.65) and SMRT.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-02-19

SGX Stock Analyst Report BUY MAINTAIN BUY 3.970 SAME 3.970