SG Budget 2019 - UOB Kay Hian 2019-02-19: Welfare Positive But Not So Much For Businesses

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COMFORTDELGRO CORPORATION LTD (SGX:C52)

SG Budget 2019 - Welfare Positive But Not So Much For Businesses

• Budget 2019 is expected to generate a deficit of S$3.5b, due to the introduction of the social support packages.
• Key development on the corporate front is a reduction in Dependency Ratio Ceiling (DRC) for the services sector, which we estimate could raise labour cost by up to 0.4-0.6% over a two-year period. The impact to earnings will be most felt by SMEs and companies with a low earnings base.
• We recommend sticking to value plays and companies with strong balance sheets.

WHAT’S NEW

• Budget 2019 – Welfare positive but not so for businesses. Singapore’s Finance Minister Heng Swee Keat delivered the 2019 Budget yesterday. Key highlights from his speech include:
• Merdeka Generation (MG) package, whereby MG seniors (Singapore citizens aged between 60-69 years old and those born in 1950s who obtained citizenship by 1996) will receive top ups, special CHAS subsidies, polyclinic and specialist clinic subsidies and MediShield premium subsidies
• Reduction in Dependency Ratio Ceiling (DRC) for the services sector from 40% to 38%, effective 1 Jan 2020 and further reduction to 35% on Jan 2021. The services sector S Pass DRC (mid-skilled foreign employees earnings more than S$2,300 per month) will also be reduced from 15% to 13% at Jan 2020 and to 10% by Jan 2021.
• Restructuring of the Diesel tax. Effective Feb 2018, excise duty on diesel will be doubled to S$0.20 per litre. In addition, the annual special tax for diesel cars and taxis will be reduced from S$100 and S$850 respectively.
• Budget 2019 will only be mildly expansionary, with total expenditure projected to rise 1.7% y-o-y to S$74.9bn and overall budget deficit of S$3.5b.

KEY MEASURES

Businesses

1. Adjusting the workforce quota for the services sector. Reduction of the services sector DRC, from 40% to 38% on 1 Jan 2020, and to 35% on 1 Jan 2021. S Pass Sub-DRC will also be reduced from 15% to 13% on 1 Jan 2020, and to 10% on 1 Jan 2021.
2. Climate change initiatives. Excise duty for diesel will be raised by $0.10 per litre to $0.20 per litre with immediate effect. The government will also reduce the annual Special Tax on diesel taxis by S$850 as well as reduce the Special Tax on diesel cars by S$100.
3. Enabling firms to scale. An additional S$100m will be set aside to establish the SME Co Investment Fund III for investing in Singapore SMEs. The SME Working Capital Loan scheme will also be extended for about two more years till March 2021.
4. Deferring the increase in Foreign Worker Levy rates for Marine Shipyard and Process sectors for another year.
5. Integrating technologies and reengineer business processes. The Automation Support Package (ASP) will be extended by two years to support firms to deploy impactful, large-scale automation, such as robotics, Internet of Things solutions, and other Industry 4.0 technologies

Individuals

1. MG Package. The Merdeka Generation (MG), referring to approximately 500,000 Singaporeans born between 1950 and 1959, will receive a boost. The government will set aside S$6.1b in Budget 2019 for the MG Fund.
2. Healthcare-based subsidies and savings for MG seniors. MG will get a MediSave top-up of S$200 a year for 5 years plus a one-time S$100 top-up to PAssion Silver cards. MG seniors will also receive additional subsidies for outpatient care for life, with coverage for common illnesses, chronic conditions and dental procedures. Additional MediShield Life premium subsidies will also be provided to MG seniors for life.
3. More affordable healthcare from Community Health Assist Scheme (CHAS) enhancement. CHAS will be extended to cover all Singaporeans for chronic conditions, regardless of income.
4. Deepen capabilities of workers to tackle disruption. Professional Conversion Programmes (PCPs) will be launched relating to blockchain, embedded software, and prefabrication to prepare Singaporeans to move into new growth areas. Career Support Programme (CSP), providing wage support to hire mature, retrenched, or workers in long-term unemployment, will be extended for two years.
5. Support for low-wage workers. From January 2020, the Workfare Income Supplement (WIS) scheme will cover workers earning up to S$2,300 a month from S$2,000 previously. The maximum annual payouts will also be increased by up to S$400 with older workers seeing higher increases in payouts.
6. Bicentennial Bonus. This is an extra one-off S$300 in GST voucher-cash that will benefit 1.4m people.
7. Personal Income Tax Rebate. A 50% personal income tax rebate for FY19, subject to cap of S$200, mostly benefitting middle-income earners.
8. Supporting workers near retirement. The government will provide a CPF top-up of up to S$1,000 for eligible Singaporeans aged 50-64 years old in 2019, who have less than $60,000 of retirement savings in their CPF accounts.
9. Tightening of GST import relief for travellers. For travellers who spend less than 48 hours outside Singapore, the value of goods bought overseas that can enjoy GST relief will be reduced from S$150 to S$100. Travellers who spend 48 hours or more outside Singapore must pay GST on overseas goods valued at S$500 or more.

SECTOR IMPACT

Healthcare

• The Merdeka Generation Package (MGP) helps to serve medical needs of the particular generation with a smaller budget of S$6.1b compared to the Pioneer Generation Package’s (PGP) S$8b. As anticipated, the benefits of MGP were not as large as the PGP’s, and its coverage was within the same areas such as outpatient subsidies, Medisave top-ups and MediShield Life premium subsidies.
• These measures such as the CHAS enhancement will help relieve healthcare expenses for an extended group of patient base and medical conditions. Potential beneficiaries include healthcare companies with primary care centres (such as Raffles Medical Group, Q&M Dental Group) which count its clinics as CHAS providers.

O&M

• Foreign worker levy hike deferred for another year. Levies for R1/R2 workers in the offshore marine sector will remain at S$300/400 per month for 2019. A levy hike to S$350/500 per month was due in 1 Jul 19, but this will be delayed by another year. The savings per worker is estimated at S$600/S$1,200 per year.
• Deferment of levy a right move but marginal impact to firms. The deferment represents a step in the right direction to help offshore marine firms contain costs in the face of continued weak demand despite higher oil prices. A pickup in orders remains the main driver for an earnings recovery for the yards, so the deferment of costs remains marginal at best.
• Carbon tax to impact SCI by 4-6% of FY17 net profit. Based on its 2017 Annual Report, Sembcorp Industries’ (SCI) direct CO2 emissions is about 2.3-3.5mt for its Singapore plants. This translates to a potential tax charge of S$11.5m-17.5m, which against FY17 net profit of S$284m, results in a 4-6% impact.

Public Transport

• ComfortDelGro to pass on savings from tax reductions in diesel taxis. The reduction in annual Special Tax for diesel tax is not likely to benefit ComfortDelGro, which is expected to pass on the savings of S$850/taxi to their drivers.
• Based on our estimates, the amount will more than offset the additional S$0.10 per litre increase in excise duty for diesel for its drivers. As such, diesel taxis will continue to remain a competitive alternative to private hire cars, and the budget impact to ComfortDelGro is largely neutral.

Services Related Sector

• Tightening of foreign manpower policy will increase labour costs. The reduction of services sector DRC from 40% to 38% in 2020, and to 35% in 2021, is expected to put upward pressure on the labour costs for companies in the services-related industry. Our back of the envelope calculation indicates that labour costs for the companies under our coverage could increase by 0.4% in 2020 and 0.6% in 2021. This is based on the key assumption that the total expenses of a local worker is around 20% more than a foreign worker.
• Labour-intensive services companies with Singapore operations will be impacted. Companies that may be affected include Sheng Siong, Jumbo Group, Raffles Medical Group, Singapore Medical Group, Health Management International, ComfortDelGro, Singapore Post, and SATS. We note that labour cost is a major expense, accounting for around 20-50% of their total revenue.

CONCLUSION/STOCK PICKS

Winners of Budget 2019.

• The healthcare sector would be the primary beneficiary due to a more comprehensive medical coverage as well as the introduction of the MGP.

Negatively impacted sectors.

• Services-related sectors include F&B, retail, transport and healthcare firms, due to the reduction in the services sector Dependency Ratio Ceiling. This will impact smaller companies and those with a low profit base.

For our 2019 strategy, we continue to focus on defensive names and companies with strong balance sheets.

• Large caps we favour include CCT, CapitaLand, DBS, Keppel REIT, OCBC, SATS and ST Engineering.
• Mid-cap gems include CSE and Fu Yu.
• SELL Golden Agri-Resources and StarHub.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-19

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