R&D Carrot May Be Ideal Diet For Some Outfits

Source : The Business Times, February 19, 2008

Estate duty abolition may also help banks and push up property prices.

It was a Budget that failed to excite the stock market very much, but analysts said that some of the initiatives announced could benefit research-intensive firms and companies in the healthcare, technology, finance and property sectors - mostly in the longer term.

Shrugging off Friday’s Budget announcement, the benchmark Straits Times Index fell 5.34 points - or 0.2 per cent - to close at 3,083.3 points yesterday.

As UOB Kay Hian predicted at the start of the day: ‘Concerns over a slower earnings growth and higher inflation will limit any euphoric market rally.’

But contrary to what was suggested by the market, some listed companies here will be better off due to the Budget, analysts said. Singapore’s bid to move up the R&D value chain could perhaps have the most impact, the analysts added.

OCBC Investment Research said that Biosensors International, LMA NV and ST Engineering could benefit as Singapore increases its yearly R&D spending to $7.5 billion, or 3 per cent of GDP, by 2010.

The firm also said that Venture Corporation and Chartered Semiconductor - both of which spent a substantial proportion of their operating expenses in R&D - stand to benefit in particular as the R&D tax deduction is increased from 100 per cent to 150 per cent and an R&D tax allowance of up to 50 per cent of the first $300,000 of taxable income is given.

‘Both Venture Corporation and Chartered Semiconductor spent a substantial proportion of their operating expenses in R&D,’ OCBC’s research unit said in a note yesterday. ‘Venture spent about $29.6 million on R&D in FY07, while Chartered spent about $159.8 million. We can expect both companies to see significant tax reductions in the coming years.’

UOB Kay Hian similarly identified Creative Technology, Venture Corp and Biosensors as listed companies that could gain from the R&D push.

Also expected to have a major impact is the abolition of estate duty, which analysts said could boost Singapore’s competitiveness as the region’s wealth management hub and attract more foreign investment.

‘We think the removal of estate duty is good news for the Singapore property market, as real estate is a natural choice for some of this money to be invested, especially with high inflation and negative real returns,’ said Lehman Brothers in a note yesterday.

The research firm noted that property prices generally gain in the 12 months following the removal of estate duty. The note said: ‘Malaysia abolished the estate duty in late 1991 and home prices rose 12 per cent on average in the ensuing 12 months. More recently, Hong Kong abolished the estate duty in early 2006 and property prices were up 6 per cent on average in the following 12 months. We think this could be more than coincidence.’

UOB Kay Hian, on the other hand, said that the clearest beneficiaries from the removal of estate duty would be financial institutions. The firm reiterated its ‘buy’ calls on DBS, OCBC and Hong Leong Finance in view of this.

UOB Kay Hian also said that listed medical plays such as Raffles Medical Group and Parkway Holdings will benefit from the government’s commitment to implementing means testing - which allows for a gradual shift of high-income patients from government hospitals to private hospitals.

However, there is a consensus among analysts that any boost from this Budget is expected to kick in only in the longer term.

‘The business-related Budget initiatives are part of the government’s ongoing efforts to transform the Singapore economy into a knowledge-based economy and grow the services sector, in our view,’ Deutsche Bank summed up in a note. ‘While positive in the long term, these moves are unlikely to have a tangible impact in the near term.’