• Investing for the future
• Supporting the middle class
• Construction, S-REITs, Healthcare benefit

Building blocks for the future

The Singapore government has unveiled the 2015 Budget, which it hopes will set up the nation’s next phase of development and, at the same time, addresses the present needs of the middle class and the poor. Finance Minister Tharman Shanmugaratnam outlined major steps in four areas – building a pool of highly skilled workers; helping businesses innovate and expand overseas; investments in economic and social infrastructure; and strengthening the social security network for retirement.

Budget boost for the middle class

One of the main thrusts of the budget is to help the middle class and the poor. Measures outlined by Mr Tharman include cash payouts for the poorest elderly; 50% tax rebate for middleincome earners; fee waivers for major exams for Singaporean students; lower childcare fees for parents under a new scheme; cut in maid levy for eligible families. Changes were also made to the CPF scheme – salary ceiling raised from S$5k to S$6k; higher contribution rates for older workers; additional 1% extra interest on first S$30k of CPF balances from age 55.

Businesses get help to expand overseas

While the government will gradually phase out the productivity boost package, it has introduced other measures to help businesses to innovate and expand overseas. Furthermore, the government has deferred the foreign worker levy hike for a year; it has also extended the corporate income tax rebate with a reduced cap of S$20k. It will offer other credit schemes to help with wage increases. Please see the individual sub-sectors that will see the most impact from the 2015 Budget.

Jubilee Budget should bring cheer

All in, the 2015 Budget, also known as the Jubilee Budget, should bring cheer as it continues with the past themes of economic restructuring and inclusive growth. Main sectors that we think should benefit most include Construction, Transport and Offshore and Marine.

Construction Sector

Continued focus on infrastructure development

As reported yesterday in the Singapore Budget 2015, infrastructure expenditures is expected to grow further by 50% to about S$30b (6% of GDP) by the end of this decade from about S$20b (4.7% of GDP) in the coming fiscal year. These figures are up significantly from S$12b five years ago. In particular, the authorities highlighted the development of Changi Airport’s new terminal 5, which will take 10 years to complete and be almost as large as T1 to T3 combined, and also the Tuas seaport which is expected to consolidate Singapore’s place in Asian and global logistics ahead. The government will also continue to make significant improvements in public transportation infrastructure to transform the heartlands into vibrant communities.

Recalibrating Foreign Worker Levies

Given the slowdown in the growth of foreign workers in the construction sector to about 10,000 in 2014, far below that in the previous two years, the government has decided defer the planned levy increases for this year for S Pass and Work Permit Holders, which will give more time for construction companies to adapt to lower reliance on manpower and incorporate more innovation in their business. To encourage construction firms to retain more productive higher skilled R1 workers, the MYE-waiver levy rate for R1 workers will be lowered from S$750 to S$600 from 1 July 2015 onwards, whereas the basic tier levy for R2 workers will be raised from S$550 currently to S$650 on 1 July 2016 and then to S$700 on 1 July 2017.

Overall positive for private construction sector

We believe the government’s continued focus on infrastructure development bodes well for companies in the construction sector, particularly those with well-established capabilities in the public projects space, strong balance sheets and good growth potential. Our top picks in this space are Libra Group [BUY; FV: S$0.33] and KSH [BUY; FV: S$0.71].

Transport Sector

S$3b investment for development of Changi Airport

As announced yesterday, one of the five growth clusters of the future identified in Singapore Budget 2015 is Logistics and Aerospace. To enable Changi Airport to keep its role as a leading hub for international transit, the Singapore government will set up a new Changi Airport Development Fund and make the initial injection of S$3.0b. The whole development of Changi Airport, including the development of a new Terminal 5 will take more than 10 years. While we do not expect to see impact on the aviation industry in the near-term, we think this measure benefits the aviation industry positively in the longer-term. Also, it was stated that the government will also invest to improve the Tuas port in the longer-term to grow Singapore as a logistics hub.

Higher petrol duties to discourage car usage

On public transport, Senior Minister of State for Transport announced that S$26.0b has been committed for the next five years. In addition, to discourage car usage, duty rates for premium and intermediate grade petrol will be increased by S$0.20/litre and S$0.15/litre respectively, with immediate effect. To ease the transition to the revised petrol duties, the Government will provide a one-year road tax rebate of 20% for cars, 60% for motorcycles, and 100% for commercial vehicles using petrol.

Note that public buses and most taxi vehicles in Singapore operate on diesel instead of petrol while trains operate on electricity. Hence, should the increase in duty rates have significant impact of lower car usage, then both transport operators, SMRT and ComfortDelGro (which owns ~75% of SBS Transit) will be positively impacted through increase in ridership. Overall, we think public transport industry in Singapore will benefit through the committed investments over the next five years.

Offshore & Marine sector

Foreign worker levy increases to be deferred

With the slow down in foreign worker inflow from 60,000 workers in 2011 to 16,000 workers in 2014 (excluding Construction), the government has decided to defer this year’s round of announced levy increases for S Pass and work permit holders for all sectors. In the Marine sector, the levy for skilled/unskilled work permit holders were supposed to increase from $300/$400 in Jul 2014 to $350/$500 in Jul 2015, but this increase has now been deferred, easing the pressure on Offshore & Marine companies. Meanwhile, the government has emphasised that it is merely adjusting the pace of foreign worker measures, not the overall direction of its measures, as restructuring towards a more manpower efficient and productive economy remains crucial.

Tax allowance for M&A to increase to 25% from 5%

The government announced that it will spend more than S$100m over five years to spur M&A in Singapore. The tax allowance for acquisition costs will increase to 25% of the value of acquisition, up from the current 5%. Companies will be able to claim M&A benefits for acquisitions resulting in at least 20% shareholding in the target company, down from the current threshold of 50% shareholding. This will benefit companies like Keppel Corp, which recently announced that it seeks to privatise Keppel Land.

Healthcare sector

Increasing capacity in public healthcare system

With the crunch in hospital bed supply faced by our public healthcare sector, the government intends to increase the number of beds in acute hospitals by 25% by 2020, doubling the number of community hospital beds as well as expanding nursing home capacity by 70%.

Improving healthcare assurance

The focus continues to be placed on providing substantial support to our pioneers, while subsidies have also increased significantly for all lower-and middle-income Singaporeans. MediShield Life, to be implemented by end 2015, will give Singaporeans protection against large medical bills. In addition, we see the adjustments to CPF and the silver support scheme complementing these healthcare subsidies in offering more affordable healthcare.

Raffles Medical Group (RMG), which plans to open its hospital extension by 2017, could help to reduce the public sector’s capacity pressure in the meantime. While the increase in bed supply by 2020 may lead to potential competition then, RMG also receives a stable inflow from foreign patients. With improved healthcare assurance comes increasing demand and waiting time at public healthcare institutions, thus we may also see some patient shift from the public to private sector especially from the middle- to upperincome group.

S-REITs Sector

Three out of four tax incentives extended during Budget 2015

During the Budget 2015 speech by Finance Minister Tharman Shanmugaratnam, it was announced that the package of income tax concessions for REITs, which was originally scheduled to lapse on 31 Mar 2015, will be extended until 31 Mar 2020. These include the concessionary income tax rate of 10% for qualifying foreign non-individual investors and tax exemption on qualifying foreign-sourced income for listed REITs. The GST concessions for REITs (also scheduled to lapse on 31 Mar 2015) have also been extended for another five years.

In addition, GST concessions will be further enhanced to facilitate fundraising by special purpose vehicles set up by REITs. This move highlights the Government’s intention to support the listing of REITs in Singapore by keeping its tax regime competitive. However, the stamp duty concession will be allowed to lapse after 31 Mar 2015. This implies that REITs acquiring properties in Singapore will now have to pay stamp duties of ~3% after the expiry of the concession.

While this will cause acquisition costs to be higher and make accretive acquisitions harder to find, we believe it will not have a significant impact on the sector. REITs with 100% exposure to Singapore include CapitaMall Trust (CMT), Frasers Centrepoint Trust (FCT), Mapletree Industrial Trust, CapitaCommercial Trust, Far East Hospitality Trust, OUE Hospitality Trust, Soilbuild REIT and SPH REIT.

Another proposed change which would impact the S-REITs sector is the deferment of the previously announced levy increases (previously scheduled to take effect on 1 Jul 2015) by one year for both S Pass and Work Permit Holders. This would be applied to all sectors, with further adjustments made to the Manufacturing and Construction Sectors. We view this as a positive for the retail, hospitality and industrial REITs sub-sectors, as it will help to mitigate some cost pressures for their tenants.

Source: OCBC Research - 24 Feb 2015