Singapore Strategy - DBS Research 2016-06-27: Flight to safety (Cont')


Singapore Strategy - Flight to safety (Cont')

Impact on companies with UK exposure

  • The 7% plunge in GBP against the SGD may not be the end of the decline as our currency strategist warns that in a worst case scenario, the GBP could fall a further 10-20% against the USD. We look at the potential impact on companies with revenue exposure to the UK and the rest of Europe.

1. Comfort Delgro. Maintain Buy, TP$3.23

  • Metroline, coaches and taxi circuit services in the UK. CD’s operations in the UK are largely from the operations of Metroline coupled with coach services and operation of taxi circuits. Operations in the UK contribute about 25%, 20% and about 18% to CD’s revenue, operating profit and net profit, respectively.
  • A 10% change in GBP affects net profit by 1.7%. With Brexit and the weakening of GBP, we estimate that every 10% change in GBP will have about 1.7%-1.8% translational impact on our forecasts. Our current forecast assumes SGD2/GBP, and at current spot of around SGD1.85/GBP (as at time of writing), this implies a 1.3% change to our forecasts, all else remaining constant.
  • The impact is largely translational in nature as CD does not repatriate its profits. The group’s Singapore operations have been and, in our view, should continue to be able to meet dividends and cashflow requirements in Singapore dollars.
  • Technical comment - Gradual downtrend since March, making fresh YTD lows since May. Key short-term support is 2.61. If this level fails, Fibonacci projection points to 2.30 before bottoming with support along the way at 2.50. Resistance 2.71, 2.80. Support 2.61, 2.50, 2.28

2. SembCorp Industries – Maintain BUY, TP $3.10 

  • Wholly-owned subsidiary Sembcorp Industries UK operates a power plant with 209MW capacity and industrial water facility that processes 174,000 m3 per day at Teeside. We believe the impact of a weaker GBP is immaterial. A 10% change in GBP affects its bottomline by a mere 0.5%, from translational loss as the UK operation accounts for ~5% of its bottomline. In addition, GBP exposure is largely natural hedged through GBP- denominated operating cost and banking facilities.
  • Technical comment – Worst case downside risk to 2.53. Resistance 2.87, Support 2.53, 2.39

3. Hutchison Port Holdings Trust Maintain BUY, TP US$0.57 

  • While HPHT should not be materially impacted by Brexit on a standalone basis, it would be significantly impacted if the status of EU is under threat from referendum contagion, as exports (and to a smaller extent imports from) to the EU makes up a substantial portion of HPH Trust’s volumes at both Yantian port and HK port. We estimate that up to a third of Yantian’s volumes are to and from Europe. Note that China is by far the EU’s source of imports. EU imports from China are dominated by industrial and consumer goods: machinery and equipment, footwear and clothing, furniture and lamps, and toys. EU exports to China are concentrated on machinery and equipment, motor vehicles, aircraft, and chemicals.

4. Property developers

  • The property developers have been venturing into the UK in recent years, taking advantage of the weakness in the GBP. We estimate that developers have a 3-11% exposure in UK (as a percentage of assets). Among the developers, City Development and Ho Bee have the highest exposure to UK and Europe, at 36% of assets.
  • City Dev - UK Asset: 11%; UK Revenue: 12%
    • The group derives their exposure through its hotels (listed MNC Plc) and investment in a portfolio of residential and commercial properties.
    • Assuming that RevPARs from its UK hotels fall by 15% (based on historical London RevPAR % change during the GFC crisis), the impact on earnings is expected to be marginal at 0.7%.
    • Technical comments - Vulnerable to weakness as it was held up by anticipation of inclusion into FTSE EPRA/NAREIT Global Real Estate Index. Downside risk to 7.90. Resistance: 8.46, 8.54. Support: 7.90, 7.23.
  • Capitaland - UK Asset: < 2%; UK Revenue: < 2%&
    • CapitaLand exposure in GBP is likely to be minimal as most of its exposure is through Ascott REIT. In terms of their exposure to Europe, it is estimated to be about 8% of revenue and 6% of assets, across the various cities of Uk, Paris and Germany.
    • Assuming that RevPARs from its UK hotels fall by 15% (based on historical London RevPAR % change during GFC crisis), the impact on earnings is expected to be marginal at 0.2%.
    • Technical comments - Stock performance is dull, sideways YTD. Fell below 2.96 near-term support last Friday on BREXIT. Next downside is 2.82. Resistance: 2.96 Support: 2.82, 2.68
  • UOL - UK Asset: 5%; UK Revenue: 7% 
    • UOL is developing a mixed-use development at Bishopsgate and recently a commercial property at 110 High Holborn London. In total, the group acquired both sites for close to GBP 195m.
    • Technical comments - Stock broke fresh YTD lows last Friday on BREXIT. Support: 5.20, 4.80. Resistance: 5.40, 5.53, 5.76.
  • Ho Bee - UK Asset: 35%; UK Revenue: 30% 
    • Ho Bee owns 6 commercial properties in London and 1 residential property which are up for lease, which accounts for 35% of group’s non current assets. All the commercial properties are fully rented out except 1 with an occupancy rate of 82%. Revenue from its London properties comprises 30% of group’s revenue.
    • Technical comments - Stock’s uptrend since mid-Feb was interrupted by last Friday’s selldown. Support at 2.10 should hold in the near-term. Support: 2.10, 1.975. Resistance: 2.24.


  • We analyse the net impact on earnings purely in terms of the FX translation effect (ignoring impact from changes in demand for rooms) on the three REITs with exposure to the GBP.
    • Ascott Residence Trust - We believe the net impact is potentially a slight positive on a translation basis as the ART’s exposure to JPY (19% of 1Q16 NPI) is higher than that of GBP (9% of 1Q16 NPI).
    • CDL Hospitality Trusts - The net translation impact is a slight negative as exposures to JPY and GBP are similar but the GBP has fallen more against the SGD (-6%) versus the rise in the JPY against the SGD (+4%).
    • Frasers Hospitality Trust - The net translation impact is negative as their GBP exposure is more than double that of their JPY exposure. Partially mitigating the short term correction in the GBP is the hedges that FHT has in place.

Singapore Telcos – Will there be a no 4?

  • The IDA will conduct a spectrum audit exercise in 3Q in preparation for companies keen to be Singapore’s 4th telco. The exercise will be held in two phases. The New Entrant Spectrum Auction will be held first, slated for Q3 2016, and is open only to interested pre-qualified parties which do not currently operate a nationwide mobile network in Singapore. Following that, the general auction will take place and the new entrant will also be open to take part. IDA is expected to conduct the financial scrutiny of the interested bidders in July before the auction in September potentially.
  • The going has not been smooth for interested parties MyRepublic and OMGTel. In June last year, SMRT said it will back out of its potential $34.5mi investment in OMGTel. OMGTel said it needs S$1bil to set up its network while MyRepublic said it needed just S$250mil. The three telcos — Singtel, StarHub and M1 — have all spent more than S$1bil to date to build mobile networks that meet IDA’s Quality of Service standards.
  • Last week, the TODAY newspaper published articles that claimed MyRepublic lost S$9.3mil in Singapore and S$5.22mil in New Zealand last year and has been unable to raise the S$250mil funds needed to roll out the mobile network. Next, according to TODAY, MyRepublic claimed that Consistel approached it for a joint bid a few months ago with 10% stake held by both parties and the rest 80% coming from a big private investor that MyRepublic rejected as it wants to go alone.
  • Telco stocks are defensive in nature that should be underpinned given higher risk aversion post BREXIT. Our pick for Singapore telco is M1. The current TP of S$2.60 factors the impact of potential new entrant.
  • Despite the upcoming spectrum audition, the big question is if the interested players can raise adequate funds for the network rollout before the auction. We have raised Telecoms sector to OVERWEIGHT in our previous strategy report, and M1 to a BUY. If there is no fourth telco entry, M1 could benefit the most as reflected in our bull-case TP of S$3.30, implying potential returns of more than 30% with an added yield of nearly 6%. Technically, we see near-term support at $2.51. A rise above $2.62 points to $2.81. If the stock is able to climb above $2.81,upside is at $3.10.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | http://www.dbsvickers.com/ 2016-06-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.23 Same 3.23
BUY Maintain BUY 3.10 Same 3.10
BUY Maintain BUY 0.57 Same 0.57
BUY Maintain BUY 2.60 Same 2.60