Consumer & Healthcare - UOB Kay Hian 2019-02-20: Marginal Drag From Tightening Of Foreign Manpower Policy

JUMBO GROUP LIMITED (SGX:42R) RAFFLES MEDICAL GROUP LTD (SGX:BSL) SHENG SIONG GROUP LTD (SGX:OV8)

Consumer & Healthcare - Marginal Drag From Tightening Of Foreign Manpower Policy

Budget 2019’s reduction of the Dependency Ratio Ceiling (DRC) will particularly affect the labour-intensive consumer and healthcare sectors. While the companies under our coverage will be impacted, we think the drag on bottom-line may be marginal at less than 4% for FY20.
Maintain HOLD on Jumbo Group (SGX:42R) (Target Price: S$0.41) and Sheng Siong Group (SGX:OV8) (Target Price: S$1.15).
Maintain BUY on Raffles Medical Group (SGX:BSL) (Target Price: S$1.30).

The government will tighten the foreign workforce quota through the reduction of DRC and S Pass sub-DRC. The first phase of reduction from 1 Jan 20 will see DRC for the services sector reduced to 38% from the current 40% while sub-DRC will drop to 13% from the current 15%. Subsequently on 1 Jan 21, DRC for the services sector will fall further to 35% and sub-DRC will be cut to 10%.

Data from the Ministry of Manpower shows that growth for the entire services sector’s DRC has been on a slow uptrend after a spike in 2015. We believe this is due to a tighter policy introduced back then.

We believe the three-tier system for the foreign worker levy introduced earlier, where companies have to pay a higher levy for tier-2 (10-25% DRC) and tier-3 (25-35% DRC) categories would have deterred many companies from having a high DRC (above 25%).
The foreign worker levy rate will remain unchanged for all sectors. Levy rates for the services sector beginning 1 Jul 20 will be announced in 2020.

Nonetheless, the reduction of DRC, which we view as a policy fine-tuning, could impact labour-intensive consumer and healthcare companies.

F&B industry participants had shared that there are already operators working with a negative foreign workforce quota and the government’s move will likely exacerbate oft-cited manpower cost pressures on vendors.
While the recalibration of the foreign workforce quota was announced earlier to give companies time to adjust, the temporary solution some companies may take is to apply for new permits just before the implementation of the new policies and extend the period before this measure kicks in by another two years. Though there may be a short-term reprieve, the long-term shift towards reliance on the local workforce and automation is unlikely to change.

Maintain HOLD, China exposure is key.
Management has been anticipating further tightening of the foreign manpower policy by the government and expects to manage its reliance on foreign workers. We are confident of Jumbo Group’s excellent execution in the Singapore market and expect it to ride through this speed bump, but maintain our HOLD recommendation as we await better profitability from its China outlets.
We have analysed the impact on net profit attributable to shareholders under various scenarios of DRC on the assumption that the local workforce will cost 20% higher than the foreign workforce.

Maintain HOLD, year of transition.
Sheng Siong Group’s management cited the introduction of self-payment systems to all its outlets by late-19. The self-payment system is expected to reduce cashier manpower needs by 20% in each store. Maintain HOLD as Sheng Siong Group remains in transition as it ramps up new store sales.
We have analysed the changes in net profit attributable to shareholders under various scenarios of DRC on the assumption that the local workforce will cost 20% more than the foreign workforce.

Maintain BUY, medical practitioners non-significant; nurses with marginal impact.
According to the Singapore Medical Council, the number of non-resident medical practitioners in the private sector is only 102 (2.2% of total private sector medical practitioners). The nursing segment, of which Raffles Medical Group employs approximately 900 staff, would pose a higher risk to the DRC changes. However, we feel that Raffles Medical Group’s track record of cost management, especially seen from the past few quarters, is commendable. Maintain BUY recommendation.
We have analysed the the impact on net profit attributable to shareholders under various scenarios of DRC on the assumption that the local nursing workforce will cost 20% higher than the foreign nursing workforce.

Yeo Hai Wei UOB Kay Hian Research | Lucas Teng UOB Kay Hian | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-20

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.410 SAME 0.410

BUY MAINTAIN BUY 1.300 SAME 1.300

HOLD MAINTAIN HOLD 1.150 SAME 1.150