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An Investor’s Look at How Foreign Worker Curbs are Affecting the Service Sector

In the recent Singapore Budget 2013, an increase in foreign worker levies as well as a reduction in the Dependency Ratio Ceiling (DRC) for foreign workers was announced. The increase in foreign worker levies across all sectors will take effect in 2014 and 2015.

The services sector should feel the worst pain under the new foreign labour policies. The DRC for the services sector was reduced from 45% to 40% for Work Permit holders while the limit for S Pass holders was reduced from 20% to 15%. In addition to the increase in foreign worker levies, a decrease in the employable number of foreign labour would likely mean an increase in overall labour costs as replacement with local labour would probably cost more.

Writers, such as Malminderjit Singh from The Business Times, have also written about how retailers and F&B outlet operators could see severe cost impacts and even manpower shortages stemming from the change in foreign worker policies.

Should investors in locally listed F&B outlet operators and retailers be worried? Let’s take a look at some of them.

Breadtalk (SGX: 5DA), a local F&B outlet operator, has 3 business segments; Bakeries, Food Atriums, and Restaurants. Of the three, the Restaurants segment was the most profitable in 2012 with pre-tax profit margins of 7% and it contributed 37.4% of overall pre-tax profit for the year. There is a strong reliance on local restaurants for Breadtalk’s overall profitability – 17 out of the company’s total of 26 restaurants were located in Singapore in 2011.

Breadtalk’s chairman, Dr. George Quek commented that management is “mindful of the tight labour market in Singapore and rising operating costs across the region. We will continue to improve our cost efficiency and productivity.” The new foreign worker policy changes might result in overall profit margin pressures for the company in the future.

Investors in property development and retail company Metro Holdings (SGX: M01) can afford to rest a little easier. The company’s retail operations, which include outlets in local malls like Paragon and Ngee Ann City, accounted for 64.2% of 2012’s revenues but contributed only 5.27% of overall pre-tax profits for the year. Singapore’s share of the pre-tax profits coming from its retail operations should be even smaller – the company operates a total of 20 retail outlets of which 12 comes from Singapore. Increase in labour costs in Singapore will still affect Metro’s retail-segment profits, but the overall impact should likely be small.

The Foolish Bottom Line

Ultimately, changes in labour costs can affect profits of businesses. Investors in local F&B outlet and retail operators should be looking at this foreign worker policy changes and understand their implications. Some F&B and retail companies might be listed in Singapore but see the majority of their profits from overseas or other segments. Examples include retailer Dairy Farm (SGX: D01), which has only 8 of its 137 hypermarkets located in Singapore. In general, companies with strong profit margins and balance sheets should likely ride through the rough times and emerge even stronger as competitors falter under pressure.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.