Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit (Part 2 of 3) SREITs, Telcos, Property Developers, Banks

Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit (Part 2 of 3) SREITs, Telcos, Property Developers, Banks Singapore Strategy Brexit Singapore REITS Telecom Sector Banking Sector Property Developers

Brexit: Reverberations from Indirect Exposures

1. Singapore REITs

1.1 Indirect exposure through FX volatility

  • Though none of the SREITs under coverage have asset exposure to the UK or the EU, the potential depreciation of risk currencies vs the safe haven SGD could lead to DPU hits. Essentially we have to worry about the AUD, the MYR, the IDR and the CNY.
    • Industrial SREITs which have ventured into Australia: Under our coverage, Ascendas REIT (BUY, TP SGD2.57), AIMS AMP REIT (BUY, TP SGD1.55) and Cache Logistics (BUY, TP SGD0.94) have 11% / 16% / 16.5% exposure by NPI respectively. A 10% depreciation of the AUD:SGD could lead to a 1.1% / 1.6% / 1.7% hit to NPI. On the balance sheet side, thankfully no FX mismatches as all three REITs have geared their Australian properties by 63% / 80% / 84% respectively with only AUD debt.
    • Starhill Global REIT (HOLD, TP SGD0.79) has 38% overseas exposure: SGREIT has 19% / 15% / 2% / 2% exposure to Australia, Malaysia, China and Japan by NPI. 50% of Malaysian and Australian income is hedged. Exposure by properties is 16% / 13% / 2% / 2.6%. Malaysia and Japan assets are 27% / 84% leveraged solely with local currency debt. China asset is unlevered. Australia assets are 71% leveraged, but 42% of that leverage is with an SGD term loan, so there is 30% balance sheet mis-match.
    • SGREIT and MCT (SELL, TP SGD1.35) have significant exposure (> 60% by NPI) to tourism related retail, which could suffer from weak regional currencies especially the IDR.

1.2 Lower for longer rates to support valuations

  • As a global asset class, REITs are very cheap relative to long bond yields (spread at +1SD), although expensive relative to stocks (spread at -1SD) and their own historical yield (-1SD). Thus we expect REITs to continue to benefit as far as asset allocation decisions go. Lower for longer interest rates will therefore continue to drive allocation towards REITs. 
  • SREITs are also relatively cheap compared to other developed REIT markets.

1.3 GDP downgrades: Retail REITs highest lease expiries

  • As tenant leases are for 3 years on average, investors only need worry if large proportions of leases are up for renewal during an economic downturn. The SREITs under our coverage do not have any particular high towers of expiration. That said, the retail REITs are the most vulnerable as they have the highest proportion of leases expiring, the highest being Frasers Centrepoint Trust (SELL, TP SGD1.78).

2. Telcos

2.1 Benefit from lower for longer, but FX could hurt Singtel 

  • Lower or low-for-longer interest rates would benefit telcos given the high absolute amounts of debt they carry. But we favour higher-yielding telcos such as StarHub (BUY, TP SGD3.54) and M1 (HOLD, TP SGD2.55) over lower-yielding Singtel (BUY, TP SGD3.82), as the latter will have its own issues with weakening regional currencies, in particular the Indian rupee.
    • A prolonged weakening of Asian currencies on the back of Brexit could affect Singtel, given its exposure to AUD, THB, PHP, IDR and INR.
    • Maybank FX expects the Indian rupee to slide the most (5.7%) against USD in the event of Brexit. Since the beginning of the year, the INRSGD cross has fallen from 46 to above 50 currently.
    • Bharti Airtel, in which Singtel has a 32.9% stake, accounted for 25% of associates’ profits or c.12% of group profits in FY3/17. Every INR1 loss will reduce forecasted profits by 0.2%.
    • Bharti accounts for 16% of our SOTP TP of SGD4.50. Marking INR to market rate of INR50 will reduce our SOTP TP to SGD4.43. Every INR1 move will change our SOTP valuation for Singtel by 1 cent.

3. Property Developers

3.1 Direct Exposure: City Dev and Ho Bee

  • Direct exposure: City Developments (BUY, TP SGD9.82) have SGD2.2b of assets held in the UK, which translates to 11% of reportable assets. Exposure to the region is mainly via its London-listed hotel arm, Millennium & Copthorne (Not Rated). In particular, London accounts for 38% of M&C’s EBIT and 14% of operating assets. We estimate that it has SGD0.7b of properties under development in the UK, which translates to 13% of development properties and 3% of group assets. NAV exposures are mitigated by GBP liabilities of around SGD0.7b. Ho Bee (BUY, TP SGD2.47) has SGD1.3b of office assets in the UK, which accounts for 35% of its non-current assets. This is offset by SGD1b of liabilities in GBP.

3.2 Interest Rates lower for longer: resilient cap values

  • Our macro team believes that we could see more interest rate cuts across the region. Under this scenario, we believe property cooling measures for Singapore will remain in place for longer to prevent a liquidity driven price bubble. Overall, we expect capital values for property assets to stay resilient in this environment. 
  • Nonetheless, if economic conditions deteriorate significantly in the medium term due to the global growth shock, home prices could plummet and acceleration in price declines could prompt a review of cooling measures.

3.3 China RRR cuts possible

  • Over the years, Singapore Property Developers have expanded their presence in the country. Five major players already have collective assets worth SGD53b on its balance sheet. While policy easing from a cut in RRR rates in the country may drive liquidity to property assets near term, our macro team is concerned over the risk of capital flight and excess capacity in the country. CapitaLand (BUY, TP SGD3.95) has significant exposure to the country at 47% of assets.

4. Banks

4.1 Growth concerns may dominate

  • Brexit meant slower economic growth in a heightened risk environment, which is negative for banks. Direct UK and GBP exposure should be marginal; Singapore banks do not disclose a breakdown of their loans and deposits denominated in GBP, except for OCBC (In 2015, OCBC had ~2% of loans and ~3% of deposits in GBP). 
  • Nevertheless, Brexit implies more volatility ahead and with more economic uncertainties, banks will be less willing to take on more risks. Possibility of lower interest rates and lower growth will lead to margin compression and lower revenues, thus cost rationalization in the sector remains a priority. 
  • Maintain Negative on banks. UOB (HOLD, TP SGD16.96) is our top pick.

4.2 USD strength

  • From a translational perspective, DBS (SELL, TP SGD13.40) should be a key beneficiary of USD strength as it has the largest USD exposure among Singapore banks, at 30% of its total loan book, followed by OCBC (SELL, TP SGD7.20) at 22%. This is likely to result in higher translational earnings.

4.3 NIM compression

  • Lower for longer interest rates will continue to compress banks’ margins and result in lower profitability. While lower rates will result in fewer delinquencies and lower impairment charges, the impact is likely to be limited as lower margins are likely to offset the reduction in credit costs.


Derrick Heng Maybank Kim Eng | Gregory Yap Maybank Kim Eng | John Cheong Maybank Kim Eng | Joshua Tan Maybank Kim Eng | Ng Li Hiang CFA Maybank Kim Eng | Yeak Chee Keong CFA Maybank Kim Eng | 2016-06-26
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 9.82 Same 9.82
BUY Maintain BUY 2.47 Same 2.47
BUY Maintain BUY 3.82 Same 3.82
HOLD Maintain HOLD 0.79 Same 0.79