2020 SG Supplementary Budget - RHB Invest 2020-03-30: Downside Protection For Selected Industries


2020 SG Supplementary Budget - Downside Protection For Selected Industries

  • Amidst expectations that the COVID-19 pandemic could take a year to be resolved, the Government announced a supplementary budget to ensure businesses most negatively impacted are adequately funded to avoid job losses while Singaporean families are well supported during this weak economic period.
  • We view the budget as mildly positive for the banking, REIT, consumer, transport, and technology sectors.

Sector Impact

Banks: Saving jobs could mitigate rise in banks’ NPL ratios (Analyst: Leng Seng Choon, CFA)

  • In the supplementary budget announcement, the Government also mentioned that MAS is working with banks and insurers to see how best to help businesses and individuals with their loan obligations and insurance premium payments, with more details to be announced. While we await greater detail on this matter, we maintain our NEUTRAL call on Singapore banks.
  • One of the key goals of the Government’s supplementary budget is to save jobs for local workers and reinstate confidence amongst households and businesses through various funding support. We believe this will help to cap the rise in Singapore’s unemployment rate over the next few quarters. This should slow the increase in delinquency rate for outstanding home mortgage, thereby helping to contain the rise in banks’ NPL ratios.
  • However, banks’ NPL ratios would still face upside risks if the COVID-19 pandemic deteriorates. UOB (SGX:U11) (NEUTRAL, Target Price: SGD20.00) is our preferred exposure to the sector, given its more conservative loan stance.

Consumer: More support lines to F&B players (Analyst: Juliana Cai)

  • Food services sector, being one of the sectors heavily affected by COVID-19, will receive more help from the Government to mitigate the decline in sales and defray rising costs from supply chain disruption.
  • Among the announced measures, the enhanced job support scheme is likely to give the most relief to food services players as the Government would pay 50% of the monthly wages for every local employee, capped at a monthly wage of SGD4,600. Enhanced Rental Waiver would only help selected tenants of National Environment Agency (NEA) and government agencies, where they receive three months and two months of rental waiver respectively.
  • The Government has also waived property tax rebates to landlords for the year and encouraged landlords to pass on the benefits from it to the tenants. However, we note that this works out to be about one month of rent for the tenants and is not very significant to retail players given the expected prolonged impact of COVID-19.
  • Amongst the food service names we follow, we expect Kimly (SGX:1D0) (NEUTRAL, Target Price: SGD0.24) to receive the most support from the Government. We estimate Kimly to receive c.SGD10m (47% of its operating costs) of net reliefs due to its high exposure to the Singapore market and significant number of local staff ( > 1,000) employed in Singapore.
  • We also project Koufu (SGX:VL6) to receive SGD6-7m (c.4% of its operating costs) of net reliefs to tide through this difficult period. As Kimly and Koufu are coffee shop and food court operators, most of the rental rebates from landlords will be passed on to help their stallholders cope with the decline in retail footfall.
  • Jumbo Group (SGX:42R) (NEUTRAL, Target Price SGD0.20) is a full-service restaurant operator, with Singapore operations accounting for c.80% of its revenue. Given its greater reliance on tourist footfall, we believe Jumbo will see the heaviest impact from the COVID-19 pandemic, amongst the food service names we follow. We estimate the group to receive c.SGD4-5m of reliefs (c.5% of operating costs) from the Government, while the group is still negotiating for better rental support from its landlords.
  • Japan Foods (SGX:5OI) (NEUTRAL, Target Price: SGD0.40), on the other hand, is expected to receive c.SGD3.5m (c.6.5% of operating costs) from the above schemes.

REITs: Additional property tax rebates for all sectors (Analyst: Vijay Natarajan)

  • Qualifying commercial properties (such as hotels, serviced apartments, retail sector) will now receive 100% property rebates from 15-30%. All other non-residential properties will receive a new 30% property tax rebate.
  • Hospitality REITS - The increased rebates will help Singapore-based hospitality players to cushion some of the sharp negative impact to their earnings caused by the COVID-19 pandemic. For CDL Hospitality Trusts (SGX:J85) (NEUTRAL, Target Price: SGD1.62), property taxes accounted for 6% of its FY19 net property income (NPI). In addition, 75% wage support will likely ease the pressure on operating costs mitigating NPI decline.
  • Retail REITs - In addition to coming up with their own support packages for the tenants, most retail REITs are expected to pass the entire property tax rebates as rent waivers. Therefore, property tax rebates will not have an impact on their earnings. The property tax rebates will translate into about one month of rent rebates for the tenants. However, the rebates, in addition to wage support packages (up to 75%), will help in providing some buffer to cash flow issues faced by retail tenants (especially the F&B sector) and potentially reducing the risk of a sharp rise in mall vacancies.
  • Office and industrial REITs - Property taxes for industrial and office REITs typically account for 7-8% of total revenue. Thus a 30% rebate translates to c.2% of REITs revenue or 0.25x of monthly rent paid by tenants. We expect the landlords to pass rent rebates on to the tenants and thus it should not have any impact on the former’s earnings. But the wage and cash flow support packages for small & medium enterprises (SMEs) are very crucial and timely in our view and will help in minimising tenant defaults and bankruptcies.
  • Overall, we maintain our OVERWEIGHT call on the REITs sector as we see good value emerging in REITs post the sharp correction in recent weeks. Our sector preference in that order is healthcare, industrial, office, retail and hospitality.
  • Our Top Picks are Suntec REIT (SGX:T82U) (BUY, Target Price: SGD 2.08), ESR REIT (SGX:J91U) (BUY, Target Price: SGD0.50), and Manulife US REIT (SGX:BTOU) (BUY, Target Price: USD0.88).

Transport: Strong assistance to aviation and land transport sectors

  • Additional support provided to the aviation sector in the supplementary budget will ensure that airlines, ground handlers, and other cargo service providers operating at Changi Airport will be able to sustain lean operations over the next few quarters and come out stronger when the impact of the COVID-19 pandemic is contained.
  • Amongst the listed players, we see SATS (SGX:S58) and Singapore Airlines (SGX:C6L) as being able to sustain downsized operations, as the enhanced jobs support scheme, enhanced aviation support package, and defer payment of fees will help cover some costs. Moreover, the recent capital-raising activities announced by both entities should ensure they remain well capitalised in a weak business environment.
  • For the land transport sector, although the Government has enhanced the earlier announced support measures for point-to-point (P2P) services providers (ie operators, taxi drivers, and private car hire drivers), operators are expected to pass on these benefits to the drivers. Even before the supplementary budget was announced, ComfortDelGro (SGX:C52) (NEUTRAL, Target Price: SGD2.25) had announced the extension of daily rental relief for its taxi hirers by SGD10.00 on top of the current SGD36.50 until the end of April. This total daily rental reduction of SGD46.50 is inclusive of the SGD10.00 Government Special Relief Fund. The group also waved taxi rental for hirers who have been given 5-day medical leave. It has already waived the rental for any of its hirers who have been placed under quarantine by the Ministry of Health or put on Leave of Absence/Stay Home Notice by the company. Despite the support extended by the Government, we do not expect material improvement in the ComfortDelGro’s earnings until measures put in place to moderate the impact of COVID-19 are eased.

Manufacturing & Technology: Jobs Support Scheme (JSS) and wage credit scheme should help (Analyst: Jarick Seet)

  • The supplementary budget focused on supporting sectors that have been significantly impacted by COVID-19, eg aviation, tourism, and F&B. The technology sector, despite being negatively impacted, has remained relatively resilient. The jobs support scheme and enhanced wage credit scheme will benefit the technology sector.
  • For stocks under our coverage, Venture Corp (SGX:V03) (BUY, Target Price: SGD19.30), Fu Yu (SGX:F13) (BUY, Target Price: SGD0.32), and Avi-Tech (SGX:BKY) (BUY, Target Price: SGD0.50) will benefit from these schemes as a significant portion of their labour force are Singaporeans. These companies will benefit from the cash support provided by the Government to cover 25% if the wages per month are capped at SGD4,600 for nine months. This, we believe, will help the companies to lower their administrative expenses.
  • We estimate cost savings of 3-5% each for Fu Yu, Avi-Tech, and Venture Corp. These 3 companies remain our Top Picks within the technology sector in Singapore.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-30
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