Last week, all eyes were on the Budget that was to be delivered on Friday, 17 Feb. We said the Budget would be more socially focused as the general election is around the corner, and we were not expecting any new significant business stimulus. As it turned out, it was what we had predicted. The Budget was generous to the people but unfortunately, not to corporate Singapore. Prime Minister, Mr. Lee Hsien Long, announced an astonishing S$2.6bn in special transfers, which includes growth dividends; bonuses for Workfare, for national servicemen and ex-servicemen; and various top-ups for individuals. The total of special transfers will send the overall budget into a budget deficit of S$2.9bn.

On the corporate front, there were no corporate tax cuts, no tax transparencies for business trusts, and no removal of withholding tax for institutions investing in REITs. There are, however, some fine-tuning to certain sectors such as the foreign REITs, Islamic banking, Maritime and logistics sector, and fund management. Relevant to the equity market will be the announcement of tax exemption on remittances of foreign-sourced interest and trust distributions received by S-REITS and the allowance of GST recovery by S-REITS for the setting up of special purpose companies (SPCs) and the acquisition and holding of overseas non-residential properties by SPCs. Fortune REIT and Mapletree Logistics Trust should benefit from this. The other direct beneficiary from the Budget announcement would be Hyflux as we flagged out last week. The government announced a S$5bn R&D Trust Fund focusing on three sectors of the Biomedical Sciences sector, the Interactive and Digital Media sector, and the Environmental and Water Technologies sector.

Given the generous ‘People’s Budget’, vicarious beneficiaries should be the mass retail market and services. Robinsons, Eu Yan Sang, and the three telcos could benefit from the extra pocket money that the government is granting to the citizens. Among the telcos, we favour Starhub at current price levels as the market unfairly punished it last Friday on the announcement of a competitor to its cable TV. We believe that the new competitor, M2B World, serves a niche market in Singapore, especially the Chinese heartlanders, with 60-80s Chinese drama serials and B-rated movies. Moreover, the mode of transmission is through the Internet protocol. As such, the threat is limited in the medium-term as we believe content is king in cable wars. M2B World does not have any sports or news channels. We believe M2B World’s competitor is a Free-to-Air TV content provider.

Looking at the week ahead, there should be a neutral reaction in the equity market to the Budget. The market appears to be running out of ideas and a directionless market favours defensive plays such as yield stocks and fundamentally sound companies. We are still positive on the oil and gas sector and we advise clients to accumulate on weakness. Sembcorp Marine continues to be our top pick in the sector. We are also still positive on the banks, despite the announcement of a fourth quarter loss by one of the three banks. We continue to believe that the net interest margins will continue to expand and loans growth continues to edge up. Our top pick for banks is UOB. Note that we cannot comment on DBS, as it will be a conflict of interest if we do so. In our large cap top 5 picks, we maintain our tactically defensive selection of MIIF, and CapitaMall Trust. We have added StarHub in place of SingTel as the latter had done well in the past three weeks. In the small caps, we maintain our top 5 picks of Pacific Andes, Inter-Roller, Darco, Electrotech and China Fishery.

Now that the budget is out of the way, we await the election announcement. Hope you have a profitable week ahead.

Extracts fm DBSVickers Report dated 9-Dec-05,

Following on from NOL’s announcement on capital reduction and special dividend of S$1.34bn or S$0.92 per share, the market is speculating on other Temasek-linked companies that have the potential to return cash to shareholders which is excess to their current and near term requirements and/or as part of an exercise to manage an efficient capital structure. We have provided a table on the next page highlighting the Temasek-linked companies, their net cash (debt) position, their dividend policy, any major capex expected, and the possibility of higher dividends.

Highlights :

(a) Singapore Telecom (Buy, TP S$2.80) has a history of returning excess cash to shareholders. In FYMar04, SingTel paid out a total of S$4bn which was close to 100% of its earnings for that year. Also, management has acknowledged that its current gearing is not optimal.

(b) ST Engineering (Buy, TP S$2.90) stands out as one cash rich company that has been paying out 100% of their net income as dividends already. As with SingTel, management has also acknowledged that its capital structure is not at an optimal level. Although it has net cash (excluding advance payments from customers) in excess of S$700m, management prefers to keep a "piggy bank" in case a major acquisition were to take place.

(c) Keppel Corp (Buy, S$14.45) has been giving out a capital repayment over the last two financial years in addition to ordinary dividends.

(d) SIA Engineering’s (Buy, TP S$3.06) net cash position is in excess of S$300m and its healthy operating cashflow should be sufficient to finance its capex requirements estimated at S$150-200m per annum. After a special dividend of S$0.20 per share in FYMar04, we do not exclude this possibility for FY06.

(e) SembCorp Marine (Buy, TP S$3.50) is a stock that maintains a high dividend policy.

(f) Singapore Airlines (Fully Valued, TP S$12.00) is lowly geared. However, its capex commitments are high given its fleet replenishment program.

(g) SembCorp Industries (Hold, TP S$3.12) : There could be a potential cashflow once the long drawn out ‘Solitaire’ issue is resolved sometime next year. So far, SCI has provided for S$565m.

Extracts fm CIMB Report dated 22-Nov-05,

Healthcare Sector

• Changes in regulations on Singapore healthcare sector. Proposed changes to MediSave and MediShield schemes could boost private medical expenditure further. The reforms are likely to result in higher private healthcare expenditure, especially from people in the higher income brackets. Other initiatives will likely channel demand to the private sector and benefit private healthcare operators. 
  
  
• The government has set a target of serving 1m foreign patients a year by 2012, generating S$3bn of revenue and creating at least 13,000 jobs. It aims to raise the healthcare sector's contribution to GDP to 3% from 0.2% in 2004. The clustering of basic and clinical research should also attract more foreign patients seeking value-added niche medical services to Singapore. This should benefit everyone in the healthcare sector. 
  
  
• Foreign patients are drawn to Singapore hospitals not because of cost considerations.Parkway (PWAY SP, S$2.06, Neutral) and Raffles Medical (RFMD SP, S$0.59, Outperform) are renowned for their ability to perform anything from basic medical screening to complex high-intensity procedures and quaternary care. They are the hospitals of choice for foreign patients coming to Singapore. Singapore’s private healthcare service providers will continue to do well as long as local and regional economic growth remains on track. 
  
  
• We continue to like Raffles Medical for its exposure to the retail hospital segment and its excess capacity for foreign patient loads. We believe an improved earnings outlook, coupled with excess Section 44 tax credits, will support higher dividend payouts. While Parkway Holdings offers equally strong prospects, we believe the positive outlook is in the price and maintain our Neutral rating.

Extracts fm JP Morgan Report dated 1-Nov-05,

Issues over the past 12 months

The most powerful sign of Singapore’s corporate restructuring, in our view, is higher dividend payouts. The payout ratios have risen from the early 90s’ pre-Asian crisis average of 0.33x to 0.53x (the average in the past six years). Singapore Inc’s “show-me-the-money” focus on capital management enhances financial discipline and has underpinned a rebound in ROEs that should prompt the market’s re-rating. The emergence of tax-advantaged structures like the REITs reinforces this transformation of the market.

Outlook

Singapore Inc’s focus on higher dividend payouts should result in a more modest long-term earnings growth trajectory as slower-growth but sustainable dividend-yield stocks become an increasingly larger component of the market. The next 12 months should see a continuation of the process whereby the stock market splits into two core component groups: (1) high-yielding stocks with transparent cash flow and below-average volatility; and (2) stocks with high growth locked-in by cyclical or structural drivers. Domestic reflationary factors in the next year include commencement of work on the Business & Financial Centre (the new downtown) plus two large-scale integrated resorts (including casinos), and recovery in Singapore’s laggard property sector.

Recommendations

We continue to counsel a balanced stock-picking approach. We expect funds flow to migrate to high-yielding stocks with defensible cash earnings (CapitaMall Trust, SMRT, SingPost) or high-conviction growth proxies (CapitaLand, Keppel Corp, Sembcorp Industries), or both, (ST Engineering). The banks are for us an anti-consensus overweight call, and we expect some performance gains in this sector as net interest margins begin to rise over the next six to nine months. Incremental performance gains are also likely to come more from the smaller-to-mid-cap space, and here we highlight stocks such as GES International, Petra Foods, LMA and Unisteel.