Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit (Part 3 of 3) Transport & Aviation, Manufacturing, Offshore & Marine, Healthcare

Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit (Part 3 of 3) Transport & Aviation, Manufacturing, Offshore & Marine, Healthcare Singapore Strategy Brexit Aviation Sector Offshore & Marine Healthcare Sector Public Transportation Manufacturing Sector

Brexit: Reverberations from Indirect Exposures

5. Transport & Aviation Services

5.1 Comfort Delgro: 20% direct exposure

  • Comfort Delgo (HOLD, TP SGD2.80) has SGD0.5b of assets held in the UK/Ireland, which accounts for 14% of non-current assets. The region accounts for 25% of sales and 20% of profits and are due to its bus and taxi business.

5.2 SIAEC and STE to benefit from USD strength

  • SIA Engineering (HOLD, TP SGD3.70) and ST Engineering (HOLD, TP SGD3.17) are beneficiaries of USD strength as they book more revenue than costs in USD. There will also be translational gains from ST Engineering’s large US operations.

6. Manufacturing

6.1 Benefit from USD strength, but beware growth risks

  • We expect Venture Manufacturing (BUY, TP SGD9.60) and Innovalues (BUY, TP SGD1.15) to benefit from USD strength and corresponding Asian currency weakness on the back of Brexit, as revenues are in USD while costs in local currencies.
  • Risks to this view: a stronger USD could raise customers’ selling prices, making their products uncompetitive, affecting their revenue growth and eventually Venture’s and Innovalues’ too. Also, if GDP outlooks get downgraded, fall in demand will likely offset USD strength.

6.2 Venture Manufacturing

  • 100% of its revenue is in USD but 70% of operating costs are in regional currencies, mostly MYR and CNY that are expected to weaken in the wake of Brexit. Venture still has 30% of operating costs in SGD as it maintains a large factory in Singapore. Nevertheless, every 10% move in USD against SGD is expected to impact earnings by 5.4%.

6.3 Innovalues

  • 95% of its revenue is in USD with only raw materials that make up c.30% of revenue in USD. All of its operating costs are in MYR, THB and CNY that are expected to weaken in the wake of Brexit. Every 10% move in USD against SGD is expected to impact earnings by 14%.

6.4 Glove manufacturers

  • Riverstone (HOLD, TP SGD0.97) and UG Healthcare (BUY, TP SGD0.52) should benefit from USD strength as sales are denominated in USD vs. costs in MYR. However, given increased competition on the supply side, impact should be limited. Both companies have no direct exposure to UK. Lower for longer interest rate will be a slight positive as it enables low financing costs for capacity expansion. Nonetheless, most players already have robust cash flow to fund expansion internally.

7. Offshore & Marine

7.1 Benefit from stronger USD, but watch oil price

  • A stronger USD would generally benefit Offshore & Marine firms as oil-and- gas-related contracts are generally transacted in USD. But these could all be negated if economic uncertainties weigh down more heavily on oil price and demand for oilfield services.
  • Ezion (BUY, TP SGD0.72) has SGD545m of bonds which could see forex gains from USD appreciation as these bonds may not be totally hedged. Books revenue and reports in USD but some costs are in SGD, so there may be a slight positive here too.
  • Sembcorp Marine (Sell, TP SGD1.00) has a UK subsidiary, Sembmarine SLP, which designs and fabricates offshore oil & gas equipment and modules. It has a 55,000 sqm construction facility in UK. We think that this business is driven more by global oil & gas dynamics and less tied to country-specific events. The proximity to the North Sea helps the company secure related contracts in the North Sea. Risks would mostly be currency related, but we understand that this is mitigated by currency hedges.
  • Keppel Corp (Sell, TP SGD4.42) owns a freehold 9-storey (130,000 sqft) office property in London which it bought for USD186m from Aberdeen Property Trust in 2015. Small relative to overall portfolio. No more infrastructure exposure in UK after handing over Greater Manchester EPC project in 2015.

7.2 Sembcorp Industries: 5.4% direct exposure

  • SCI (SELL, TP SGD2.35) owns a utilities business in Teeside, UK with 200MW of power capacity plus water and steam facilities. UK accounted for c.5.4% of SCI’s total net profit and 1.7% of total assets in FY15. On the immediacy, revenue from this business is in GBP. The potential risk is that if the UK economy/industrial activities decline, power demand could come down. Nevertheless, the impact as a whole to the group is small based on the amount of exposure relative to the group. SCI also hedges its UK investments with GBP/SGD cross currency swaps and forward contracts which will mitigate currency risks from changes in net assets.

8. Healthcare

8.1 Weak regional currency could be headwind

  • Strong SGD vs other regional currencies, is a negative for the medical tourism industry, which has just started to recover this year. Raffles Med (BUY, TP SGD1.73) has 20% exposure by revenue/NP to medical tourism.

8.2 Lower for longer: positive for debt funded expansion

  • As Q&M Dental (BUY, TP SGD1.08), ISEC (BUY, TP SGD0.42), and Raffles Med are all in expansion mode, cheap financing costs is a positive.


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 | http://www.maybank-ke.com.sg/ 2016-06-26
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.80 Same 2.80
SELL Maintain SELL 2.35 Same 2.35
BUY Maintain BUY 1.73 Same 1.73