SINGAPORE (Nov 29): At the recent People’s Action Party (PAP) convention on Nov 19, Prime Minister Lee Hsien Loong said that “raising taxes is not a matter of whether, but a matter of when”.

Lee also said that the tax raise is to support growing government spending.

Now, experts are expecting an increase in the Goods and Services Tax (GST).  

See: Singapore growth could top 3% in 2017, says PM Lee

See: Singapore to bite the GST bullet to ensure fiscal sustainability: DBS

Following Lee’s speech, RHB is maintaining its “overweight” rating on Singapore’s consumer cyclical sector.

In a Wednesday report, analyst Juliana Cai says, “We believe this could come after the next general election, since the government has highlighted the adequacy of revenue for the current term, which ends in 2021.”

The last time GST was adjusted was in Jul 2007, when it increased to 7% and remained the same until now.

Cai also notes that the government has hinted several times about implementing taxes on e-commerce spending and thinks that this could come before the GST hike.

“We believe this move could help level the playing field for brick-and-mortar players and local GST-registered vendors,” says Cai.

Among the consumer stocks that the research house covers, the analyst believes that supermarket retailers Dairy Farm and Sheng Siong should be less affected by a GST hike, given the nature of consumption of staples.

Moreover, taxes on e-commerce spending may even make shopping at brick-and-mortar supermarkets even cheaper, but the analyst does not think that consumers may cut down on festive expenditures, which are considered more discretionary.

RHB has rated Sheng Siong a “neutral” with a target price of 98 cents and Dairy Farm a “buy” with a target price of US$8.31 ($11.18).

Meanwhile, food retailers such as BreadTalk may see a slight retraction if consumers trade down to small neighbourhood bakeries and coffeeshops that are not subjected to GST.

Neo Group’s catering arm and food retail business may also be negatively affected.

“Still, we believe the overall impact would be mitigated as the group has been trying to move upstream into the food manufacturing and food trading business,” says Cai.

RHB is rating BreadTalk a “buy” with a target price of $1.83, while Neo Group is rated “neutral” with a target price of 64 cents.

On the medical goods and healthcare services front, Cai believes that Raffles Medical’s general practitioner services arm would remain resilient as most of its patients are on corporate health insurance, but its hospital services segment is likely to be less price-competitive compared to regional players.

RHB is maintaining its “neutral” call on Raffles Medical with a target price of $1.10.

PM Lee also mentioned during the convention that Singapore’s GDP is projected to moderate to 2-3% annually after 2020.

This means the impact of the next GST hike would not be mitigated by strong economic growth.

“In a moderate growth environment, we believe consumer discretionary players would underperform compared to consumer staples and medical goods & toiletries producers, when that happens. The consumer discretionary segment, however, might potentially see a strong spike in sales prior to a GST hike as consumers rush to make big purchases before prices increase,” says Cai.

As at 1.00pm, shares in Dairy Farm are trading at US$8.25, Sheng Siong at 95 cents, BreadTalk at $1.58, Neo Group at 69 cents and Raffles Medical at $1.07.