Singapore Strategy - CGS-CIMB Research 2020-02-19: Hands Are Tight

SATS LTD. (SGX:S58) SHENG SIONG GROUP LTD (SGX:OV8) SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Strategy - Hands Are Tight

Consumer sector could be the biggest winner with cash distribution and grocery vouchers implying a slight uptick in spending. No GST hike in 2021.
We welcome the job support scheme to ease short-term staff costs, but the Covid-19 relief offers very little reprieve to affected industries, in our view.
Stocks with direct implication: Sheng Siong Group (SGX:OV8), Dairy Farm International (SGX:D01), Singapore Airlines (SGX:C6L), SATS (SGX:S58), CDL Hospitality Trusts (SGX:J85), Far East Hospitality Trust (SGX:Q5T), UOL Group (SGX:U14), Genting Singapore (SGX:G13), ComfortDelGro (SGX:C52), Jumbo Group (SGX:42R), Yongnam (SGX:AXB) and ST Engineering (SGX:S63).

The budget is designed to help the population keep jobs and cushion against the negative impact of Covid-19 on corporates. Refer to our economist report for details. From the perspective of equity, the relief offers a mild positive impact to the affected sectors - gaming, hospitality, F&B, aviation, airport services, land transport, retail and SMEs (See Figure2 and Figure3 in attached PDF report for summary).
We keep our FSSTI target for CY20 at 3,275 pts, based on 12.5x CY21F P/E.
We think the consumer sector (mainly supermarket operators such as Sheng Siong Group (SGX:OV8) and Dairy Farm International (SGX:D01)’s Giant outlets) gains the most, thanks to the implied one-off uptick in spending as a result of cash distribution and grocery vouchers. The labour-intensive structure could also benefit from a short-term jab of job support scheme grants for wages capped at S$3.6k. We expect Sheng Siong Group to generate c.12% EPS growth in FY20F. Upside could come from stronger sales and rebates.

The impact from property tax rebates across sectors to cope with potentially lower revenue is generally minimal. The highest rebate (30%) goes to the hospitality sector but the impact of the rebates is likely to be marginal to earnings.
We estimate savings of 1- 2% and 1-3% of NPI and distributable income, respectively, for hospitality REITs. Companies under our coverage with exposure to the hospitality sector include CDL Hospitality Trusts (SGX:J85), Far East Hospitality Trust (SGX:Q5T), OUE Commercial REIT (SGX:TS0U) and Suntec REIT (SGX:T82U) (convention business). For Singapore hotel owners such as UOL Group (SGX:U14), tax savings are minimal at c.1% of net profit.
We think this change will have a neutral to slightly positive impact on share prices of REITs and developers. For hospitality trusts, the operating environment remains challenging with an expected slowdown in tourist arrivals and drag on occupancy and room rates. Trading conditions are likely to remain difficult for retailers, especially those in the discretionary shopping category.

Singapore Airlines (SGX:C6L) will likely benefit from rebates on aircraft landing and parking charges as these direct costs account for 7% of the group’s opex, but the quantum of the rebates is quite small. We estimate that SIA Group will save at least S$16m-17m in costs over a six-month period, not material against its half-year cash operating costs of c.S$6.5bn.
We estimate SATS (SGX:S58) to have one-off savings of c.S$3m on staff costs in the upcoming quarter from the job support scheme. The higher ceiling for the wage credit scheme could also add S$2m- 3m p.a. The total impact is also minimal given that SATS’ staff costs amount to c.S$230m/quarter (or c.47% of average opex).
The upside is if there is any incentive from Changi Airport to reduce SATS’ licence fees (as it did during 2016-17 due to the soft aviation industry then). SATS incurs licence fees of c.S$23m/quarter, or c.5% of average opex.

We are slightly disappointed by the unchanged workers levy as well as the reduction of S Pass DRC for construction and marine sectors. These measures do not help companies such as Keppel Offshore & Marine, Sembcorp Marine (SGX:S51) Marine and Yongnam (SGX:AXB) that have a relatively high reliance on foreign workers.
Conversely, the smart-nation focus continues as the government will be dishing out S$1bn spending over three years on cyber security and data protection capabilities. ST Engineering (SGX:S63)’s electronic division could see a mild positive from this.
Continue to read the 16-page PDF report attached for complete analysis.

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-19

SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 4.070 SAME 4.070

ADD MAINTAIN ADD 1.46 SAME 1.46

HOLD MAINTAIN HOLD 8.460 SAME 8.460