Singapore Strategy:Support for consensus EPS growth

Event

The MOF announced an expansionary budget for FY17, with +5% spendinggrowth well ahead of operating revenue growth of only +1%. The link betweenfiscal spending and index EPS growth is patchy (middle chart on the left). Butwhen combined with a rebounding NODX (Fig 5), a more stable S$ (Fig 6)and 2016’s low base (Fig 7), we now see better support for consensus andour bottom-up calls for mid single-digit percentage FSSTI earnings growth,versus at the end of last year. But with FSSTI’s PER now in its upper channel(Fig 8), we think most of the good news is priced in.

Impact

Another expansionary budget… FY16’s spending of S$71.4b fell short ofbudget (S$73.4b) and 2016 GDP growth sustained at an underwhelming +2%.

The FY17 budget acknowledges ongoing headwinds in cyclical sectors andupticks in unemployment. It addresses these via the continuation of initiativesfrom the FY16 budget and adds new concessions on foreign worker levies inselected sectors, incremental corporate tax relief and the pulling forward ofinfrastructure spending. Longer-term programmes address issues elicited bythe recent Committee on the Future Economy report. While there was no bigheadline initiative like last year’s S$4.5 Industry Transformation Programme,the budget does call for a wider primary deficit of –S$5.6b (versus FY16’s –S$2.7b) and a lower overall surplus of S$1.9b, versus FY16’s S$5.2b .

…With a cautionary coda: We note the increasingly cautious commentarytowards the end of the budget speech, culminating in a call for higher taxesover time, as Singapore faces structurally rising expenditure amidst its ageingpopulation. Indeed, Healthcare has remained a key growth area in recentyears, as has Environment, National Development and Transport (Figs 2-3).

Positive read across for healthcare, construction, and banks. Continuedgrowth in healthcare spending supports our positive call on IHH Healthcare,which derives ~40% of EBITDA from Singapore. The pull forward of S$700min infrastructure projects can benefit Singapore’s mid cap construction names.

Singapore SMEs stand to benefit most from tax concessions and workercredits, which should allay concerns around this exposure for the Singaporebanks (7-11% of their loan books), on which we have a positive view. Foreignworker levy hikes are deferred by a year for the Offshore and Marine sector,but the sector’s larger offsetting order book challenges keep us cautious.

Looking beyond the budget, incremental support for mid-single digitFSSTI earnings growth. We find that FSSTI earnings growth is mostcorrelated with NODX, which is outside the government’s control, and othermetrics like the strength of the S$. NODEX has been rebounding off a lowbase (Fig 5). S$ is demonstrating stability (Fig 6) as we think concerns over apotential re-centring of the NEER band by MAS are pushed more into Octoberfrom April (and an expansionary budget does help in this regard).

Outlook

Based on the above, we see better support for consensus’ (and our bottomup) call for mid-single digit index earnings growth in 2017. But in light ofFSSTI’s sharp re-rating, we also see most of this good news as priced in.