Singapore Strategy - CGS-CIMB Research 2020-03-27: Measures To Cushion Impact, Not Turnaround, Cut 2020 Year-End STI Target To 2050


Singapore Strategy - Measures To Cushion Impact, Not Turnaround

  • The second relief package of S$48bn was a positive surprise but we caution that this is to cushion the impact, not to engineer a turnaround.
  • The biggest relief is the enhanced job support scheme helping the aviation, tourism-related and food services industries; Singapore Airlines (SGX:C6L), SATS (SGX:S58), Genting Singapore (SGX:G13) and Jumbo Group (SGX:42R).
  • Our economist cut 2020 GDP growth to -2.6% assuming normalisation of the economy by end-Jul. We keep 13% y-o-y decline in market EPS for 2020F.

Second stimulus package

Worst economic contraction since independence

  • According to flash estimates released by the Singapore government, the economy contracted by 2.2% y-o-y in 1Q20, reversing the 1% growth in the preceding quarter. On a q-o-q seasonally adjusted annualised basis, the economy shrank by 10.6%, a sharp pullback from the 0.6% growth in the previous quarter. This is the worst contraction since independence and the Global Financial Crisis in 2009, and compares with the +1% logged in 1Q19.
  • Taking into account the weaker-than-expected performance of the Singapore economy in 1Q20, and the sharp deterioration in the external and domestic economic environment since Feb, the Singapore government further downgraded the GDP growth forecast for 2020 to “-4.0 to -1.0%”. The wider forecast range is to account for heightened uncertainties in the global economy, given the unprecedented nature of the Covid-19 outbreak, including the public health measures taken in many countries to contain the outbreak.
  • Our economist cut 2020 GDP growth to -2.6% assuming normalisation of the economy by end-Jul. We keep our forecast of a 13% y-o-y decline in market EPS for 2020F.

Save jobs, support workers and protect livelihoods

  • We believe the second relief package is designed to help the population to keep and create jobs in the midst of crisis. During SARS and the Global Financial Crisis, unemployment for Singapore residents peaked at 6.2% and 4.9%, respectively.

S$15.1bn for 1.9 million employees, more than twice during the GFC.

  • We think this is the biggest relief from the supplementary budget. In general, the government’s co-fund wages will increase from 8% to 25% for each local worker.
  • Firms in the food services sector will receive higher support, at 50% of wages. Firms in the aviation and tourism sectors, which are the most badly affected sectors, will be supported at 75% of wages.
  • The government will also raise the qualifying wage ceiling to S$4,600, up from S$3,600. The scheme will be extended for another two quarters until the end of 2020.
  • Figure3 in attached PDF report lists the impact from all the sectors under our coverage with Singapore Airlines (SGX:C6L), SATS (SGX:S58), Genting Singapore (SGX:G13) and Jumbo Group (SGX:42R) being the biggest beneficiaries.

SIA group could see cost savings of S$621m in staff costs.

  • The government is increasing the value of its assistance to the aviation sector significantly. In the original February budget, the government promised S$112m in assistance to the aviation industry, of which a small estimated S$16m is due to be received by Singapore Airlines (SIA, SGX:C6L). In this March supplementary budget, an additional S$350m ‘enhanced aviation support package’ has been set aside to fund measures such as rebates on landing and parking charges, and rental relief for airlines, ground handlers and cargo agents.
  • We estimate that Singapore Airlines may receive some S$50m from this enhanced package (no details provided), which means that SIA may benefit from c.S$46m in total assistance, which is not material relative to its annualised cash operating costs of S$13bn. The larger impact comes from the Jobs Support Scheme (JSS). We estimate that the SIA group has c.25,000 staff in total, comprising 16,000 staff at SIA mainline, 4,500 at SilkAir and Scoot (our estimate), and 4,500 staff at SIA Engineering (SGX:S59).
  • Assuming 80% of the group staff are Singapore citizens or permanent residents, the cost savings are a maximum of S$621m (25,000 staff x 80% x S$4,600/month x 9 months x 75%). With total SIA group staff costs at approximately S$3bn p.a. normally, staff cost savings would be around 21%, which is quite significant. Against SIA group’s annualised cash operating costs of S$13bn, the JSS would amount to some 5% cost savings.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

SATS could see cost savings of S$150m in staff costs.

  • We estimate a total receipt of c.S$51m/quarter (or S$153m for 9 months) assuming 5,000 or 50% of its Singapore-based staff (excluding Singapore Food Industries) qualify for JSS. Similar to SIA, SATS (SGX:S58) will benefit from the S$350m enhanced aviation support package such as licence fee/rental relief. The 100% property tax rebate for cruise terminals also help but we believe the overall impact is minimal.
  • The pressure from revenue plunge from the global lockdown exceeds the cost savings and could lead to a cash burn of c.S$120m-150m in FY3/21F, wiping out its historical net gearing position. Our current Target Price of S$4.07 (19x CY21F P/E) has not incorporated potential losses and cash burn effects.
  • See SATS Share Price; SATS Target Price; SATS Analyst Reports; SATS Dividend History; SATS Announcements; SATS Latest News.

Genting could save c.S$70m-171m in FY20F.

Jumbo could see 16% savings on staff costs.

Property tax rebates pass it on

  • The increased property tax rebate to 100% (from 30%) for qualifying commercial properties such as hotels, serviced apartments, tourist attractions, shops and restaurants are likely to be passed on to tenants to defray some of the tenants' operating costs. The measure is not expected to boost landlord revenue. Together with the JSS, hotel operators will see a positive impact as staff cost is the major component of their operating expenses.
  • From the hotel REITs perspective, the wage credit is likely to have a positive impact at the property level but minimal on the REITs given their master lease structure. The property tax rebate could cushion the hospitality REITs FY20 DPU decline if they do not pass on the rebate. All other non-residential properties such as office and industrial property will receive a new property tax rebate of 30% but we think tax savings are likely to be passed on to tenants.

Who has broken the lows

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.00 DOWN 8.460