SHENG SIONG GROUP LTD (SGX:OV8)
KOUFU GROUP LIMITED (SGX:VL6)
JUMBO GROUP LIMITED (SGX:42R)
BREADTALK GROUP LIMITED (SGX:CTN)
DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)
Singapore Retail Sector - Labour Reforms In Singapore’s Retail Industry
- Maintain NEUTRAL on the Singapore retail sub-sector; preferred pick: Sheng Siong.
- The tightening of the foreign workers quota for the services sector takes effect on 1 Jan 2020. We think this is likely to cause near-term cost pressure on the retail and food & beverage (F&B) industries.
- Firms like Sheng Siong and Koufu, which have made good use of government grants to invest in automation over the past years, should be less impacted by the labour crunch.
Negative for retail and F&B service industry in the short run.
- During the announcement of Budget 2019, Finance Minister Mr Heng Swee Keat announced that the cut in the foreign labour dependency ratio ceiling (DRC) will take effect in 2020-2021. This is negative for the retail and F&B service companies operating in Singapore, as they would need to find ways to attract more Singaporean workers or resort to automation – which involves more upfront capex and depreciation costs in the near term.
Labour reforms in retail and F&B
Labour structure reforms in the retail and F&B sector.
- There are more than 26,000 retail establishments in Singapore and they account for 4.4% of total employment here. In February, Finance Minister Mr Heng Swee Keat announced Singapore’s Budget 2019, and said there will be a cut in the foreign workers quota for the services sector – with F&B and retail being the key targets. Mr Heng added that this was due to the higher growth in S-Pass (for mid-level skilled foreigners earning at least SGD2,300 per month) and work permit holders, and that the F&B and retail sectors are still very labour-intensive.
- This comes six years after the last cut in the foreign workers quota, in 2013. Following this year, the foreign labour DRC is expected to tighten from 40% to 38% in 2020, and to 35% in 2021. The S-Pass sub-DRC is expected to drop from 15% to 13% in 2020, and to 10% in 2021. This is negative for all F&B service and retail companies operating in Singapore as they would need to find ways to employ more Singaporeans or resort to automation, which would mean more upfront capex and depreciation costs in the near term.
Change in demographics makes it none the better.
- While Mr Heng highlighted that the ultimate goal is to enable Singapore residents to continue to have good jobs and opportunities, we note that the non-professionals, managers, executives and technicians (PMET) jobs are not where Singaporeans want to work. The structure of F&B and retail service jobs – which imply long hours and weekend shifts – have not made such positions popular amongst the locals. As such, these sectors typically find it hard to attract local staff.
- Moreover, over the last 10 years, the proportion of university graduates in Singapore has risen from 21.8% to 31.6%, leaving less people being interested in taking these frontline jobs. The salary levels of jobs in these industries do not attract retrenched PMETs, who might be better off financially if they reskill and change career options to something other than being on the frontline for F&B or retail services. Last, with the slow growth in the population and workforce, retail and F&B players will only find it harder to cope with a tighter labour crunch in the longer run, if productivity does not improve.
Short term pain, long term gain (hopefully)
Best case scenario: Investing in technology and automation.
- To avoid paying higher costs to attract labour, the Government hopes that the services industry will invest in technology and automation. Companies moving in this direction are likely to incur higher capex in the short run.
- To support this change, the Government will provide enhanced funding support through the Enterprise Development Grant (EDG) and Productivity Solutions Grant (PSG). EDGs provide firms with up to 70% government funding to undertake projects which strengthen their business capabilities, improve operational efficiencies and internationalise.
- Meanwhile, PSGs provide firms with up to 70% funding to adopt pre-scoped, off-the-shelf productivity solutions and technologies. Eligible firms will be able to receive a subsidy for up to 70% of their out-of-pocket training expenses, capped at SGD10,000 per enterprise.
Interim solution: tapping senior workers.
- Finding suitable automation solutions and implementing them within one year would be key challenges for firms in the affected industries. We believe tapping senior workers would be one of the interim solutions. Singapore has an ageing population and a limited social safety net. With rising life expectancy and cost of living, elderly citizens without adequate savings for retirement would have to continue working.
- To support the reemployment of older workers, the Government also has schemes to help offset senior employees’ pay since 2011. These schemes would be extended until 31 Dec 2020. However, if not for the limited workforce available, we believe the subsidies would not be compelling enough for firms to specifically hire more senior workers.
Retail and F&B players are key losers of the labour reforms,
- .. as they will likely incur higher capex or manpower cost after the DRC tightens.
- For companies with operations in Singapore, we like firms that have already invested in automation procedures, and are less likely to be affected by the manpower supply crunch come 2020.
Retail stocks on our radar
- Prefer companies with a head start in automation.
- Rating: BUY, Target Price: SGD1.23 – least impacted by DRC tightening.
- Management believes that the group will be able to cope with the tightening of DRC in 2020-2021, as it has begun investing in hybrid check-out counters and automation in its distribution centre. Currently, two-thirds of its outlets have implemented the hybrid check-out counters.
- Management believes that the group will be able to free up some manpower needs by 2020, once it rolls out the hybrid check-out counters in the remaining one-third of its stores. In addition, the extension of its distribution centre (20% of current capacity) – expected to be completed by year-end – also features more automation to reduce the reliance on manpower.
- Sheng Siong is one of our Top Picks in the consumer sector, and the preferred pick for the retail sub-sector. Since it has begun embarking on automation since 2015, we believe it would be less affected by the anticipated labour crunch in 2020. We project a 9% earnings CAGR over FY18-21F, led by the increase in store count and improved operating leverage, as new stores mature.
- Rating: BUY, Target Price: SGD0.47 – expansion of higher-margin brand helps.
- According to the group, its cost of hiring local and foreign workers is similar after factoring in foreign worker levies and benefits. It will look to hiring more local workers post-2020, once the tighter DRC kicks in. On a per store basis, we expect labour cost to go up.
- However, the group has opened more Jumbo Seafood restaurants in Singapore in FY19, as they represent the profitable brand in its portfolio. Labour cost as a percentage of sales for Jumbo Seafood Singapore is also lower than other brands. Hence, on a group basis, we do not expect significant margin deterioration when the DRC tightens. We expect earnings to grow at 15% CAGR over FY18-21F, with margins staying relatively stable.
- Rating: NEUTRAL, Target Price: SGD0.81 – more could be done in the central kitchen.
- BreakTalk should not be severely impacted by changes in the DRC ratio as it has a diversified geographical market. Only c.54% of BreakTalk’s revenue is attributed to its Singapore business. Moreover, the group built its central kitchen in 2013 to automate some of the manual cooking/baking procedures, thereby reducing manpower reliance – especially in the bakery segment.
- We believe the restaurant segment (25% of group’s revenue) would be the one taking the biggest hit, given that its Din Tai Fung brand focuses on good service and is the most labour-intensive. Currently, Din Tai Fung customers put their orders on a piece of paper, and hand it over to a server. We believe the group can reduce manpower requirements by adopting self-ordering kiosks or electronic tablets, which are already prevalent in other food service retailers in Singapore.
- We estimate a 14% earnings CAGR for the next three years, but remain NEUTRAL on the stock for now, on its higher-than-average P/E, and higher capex required for its store expansion plan in the near term.
- Rating: NEUTRAL, Target Price: USD8.25 – the going gets tougher.
- We estimate only c.15-20% of Dairy Farm revenue is attributed to Singapore. Hence, DRC tightening may not have a huge impact on Dairy Farm’s overall cost structure. However, we note that its ASEAN supermarket operations have not been profitable. The increase in labour costs or higher capex required for automation in Singapore could therefore slow down the turnaround of ASEAN operations.
- We remain NEUTRAL on Dairy Farm, as slower growth in Hong Kong’s health & beauty industry could eventually taper its growth in that segment. Ongoing protests are also likely to hamper consumer sentiment and tourist arrivals into the city.
- Not rated, Target price: N/A – automation in place and more to come.
- Currently, we do not have a recommendation for Koufu. That said, we like the stock for its valuation as well as the company’s growth prospects. We believe Koufu will not be impacted by changes in the DRC ratio.
- Over the years, the group has improved productivity through the use of roaming tray-return robots and adoption payment systems that accept both cash and cashless options.
- Moving into 2H20, Koufu’s integrated facility will allow the group to have centralised dishwashing to reduce its reliance on manpower. It will also be renting out unutilised space in its integrated facility to stall tenants as having a mini-central kitchen would help them improve labour productivity.
Juliana Cai
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-07-02
SGX Stock
Analyst Report
1.23
SAME
1.23
99998.000
SAME
99998.000
0.470
SAME
0.470
0.810
SAME
0.810
8.250
SAME
8.250
