Singapore Strategy - CIMB Research 2016-06-25: Preparing for 'Eurogeddon'

Singapore Strategy - CIMB Research 2016-06-25: Preparing for 'Eurogeddon' SINGTEL Z74.SI  VENTURE CORPORATION LIMITED V03.SI  GENTING SINGAPORE PLC G13.SI 

Singapore Strategy - Preparing for “Eurogeddon”

  • The sell-down could continue as the market grapples with contagion uncertainties, political instability and darker deflationary fears in Europe, post-Brexit.
  • The road ahead is difficult and this may not be the best time to hunt for Brex-dip. However, telcos, selective REITS and US$ gainers could offer some reprieve.
  • Our top picks are Singtel, MAGIC, CCT, Venture, STE, Genting Singapore, Tianjin Zhongxin Pharmacel and SATS.

More volatility on contagion fears

  • The FSSTI fell 2% to 2,735 post-Brexit. We see this knee-jerk sell-down as an indiscriminate one, not focused on any direct exposure with the GBP or Euro. We expect the weakness to continue as the market grapples with the uncertainties surrounding contagion risks.
  • Brexit has set the precedent of democracy gone out-of-hand, and potentially a harbinger of more such ‘referendums’ in Europe to come, including reigniting the prospect of Scottish independence and other EU countries attempting to renegotiate new terms with Brussels.
  • An even weaker European economy following Brexit may also drag down the US, China and global economies as the ripple effects of lower financial investments, deposit flights from weaker financial institutions, potential job losses and possible social unrest in Europe spread around the world.

Who will not be scathed much in Singapore?

  • Banks. Direct impact comes from ownership of any debt papers or investment
  • securities linked to UK or European banks. Although UOB has been caught with the highest amount of Europe bank debt exposure in 2011, the 2011 Euro crisis and the new Basel charges (for holding of other FIs' investment securities) have spurred the banks to pare that down significantly.
  • We believe all three banks do not own much European bank investment securities in their AFS book. That aside, all three banks are potential losers to a weak revenue generation environment if capital markets continue to crumble. A plausible winner is SGX, if London derates as a global financial centre in the longer-term.
  • Telcos, shelter in a turbulent environment. The hefty investment required and the lack of track record by the potential fourth telco could stall the bid for the upcoming spectrum auction, protecting the turf of the exiting incumbents in the meantime. Singtel is our preferred pick with the least risk of market share loss.
  • Selective REITS. MAGIC is a candidate on an FX tailwind with resilient portfolio, underpinned by Festival Walk. More than 70% of its 1H17 distribution income has been hedged with income stability. We also like CCT for the boost from CapitaGreen.
  • US$ gainers: An exporter like Venture Corp is the most representative stock of a gainer from the stronger US$. STE, with c.24% of its revenue and assets based in US, will also see some translations benefits.
  • Tourism play: A weaker S$ could back the influx of Chinese tourists into Singapore. SATS will benefit from higher Changi traffic. Genting Singapore is cheap at 0.9x P/BV, and likely to see gaming volume sustained by increased Chinese contribution.
  • Healthcare: Tianjin Zhongxin has little impact from currency woes and geared to the macro trend of an ageing population in China.

Highlighted Companies

Singtel ADD, TPS$4.50

  • Attractive yield of 4.5-5.5% with steady medium-term earnings growth outlook. It is also the least impacted by the potential entry of a fourth mobile player.

Venture Corporation ADD, TPS$9.52

  • Beneficiary of a strengthening US$, recovering US economy and weak Asian currencies. It is also backed by strong FCF and attractive dividend yield of c.6%.

Genting Singapore ADD, TPS$9.52

  • At 0.9x P/BV, the stock looks cheap. The potential earnings upside from Jeju’s contribution is not priced in. 
  • Concerns of a possible injection of RWLV by parent GENT may be over-hyped as IPT considerations are a hurdle to cross.

LIM Siew Khee CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-25
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 4.50 Same 4.50
ADD Maintain ADD 9.52 Same 9.52
ADD Maintain ADD 0.89 Same 0.89