Singapore Strategy - UOB Kay Hian 2016-06-15: What If Brexit?

Singapore Strategy - UOB Kay Hian 2016-06-15: What If Brexit? Singapore Strategy BUMITAMA AGRI LTD P8Z.SI CHINA AVIATION OIL(S) CORP LTD G92.SI CITY DEVELOPMENTS LIMITED C09.SI

STRATEGY - What If Brexit?

  • We analyse the implications of Brexit on the FSSTI and highlight stocks that could be impacted by the long-awaited upcoming referendum on 23 June.


All eyes on the referendum. 

  • The referendum on 23 June to decide whether Britain should leave or remain in the European Union will be a closely watched event. 
  • This research reports analyses the impact of a potential Brexit (Britain Exit) on the FSSTI stocks.


Rising odds on leaving but too close to call. 

  • Our check, based on Bloomberg’s poll, indicates rising odds of a Brexit. 
  • From a high of 54% (on 16 Feb 16) to remain in the EU, the latest poll indicates that this percentage has declined to 43%. This compares with the 42% in the “leave” camp, which suggests a very close call as the “undecided” segment of 15% will likely determine the outcome. 
  • Other non-partisan information on UK attitudes on the referendum indicates a close call, with the latest estimates at 51% to remain and 49% to leave the EU.

Implications of Brexit on the GBP. 

  • UOB Global Economics and Market Research (UOB GEMR) believes that ultimately, the UK will vote to stay in the EU. However, it would be a very close call and the GBP/USD is likely to remain volatile in the run-up to the referendum on 23 June. 
  • While there have been calls for a 20% decline in the GBP/USD in the event of a Brexit, UOB GEMR thinks this is too excessive. 
  • Key levels to watch out for would be 1.3836 (2016 low) followed by 1.3503 (2009 global financial crisis lows).

 Potential economic implications. 

  • While the full extent of the potential economic implications is unknown, Brexit could have significant implications on the economy beyond the foreign exchange. This could include a weaker GDP outlook and implications in areas such as investments, trade and the current account deficit
  • In terms of economic impact, sources such as The Economist predict a three-level impact, with the near-term impact seen in a sell-off in UK assets and a weaker pound. 
  • The impact on GDP would be 3-4% below baseline non-Brexit forecast by 2017-18 and about 6% below by 2019-20. 
  • There would also be political implications as a Brexit would make it more challenging for Prime Minister David Cameron to survive the political fallout.

 Stock-specific implication. 

  • In terms of stock exposure, companies with significant exposure to the UK include Ho Bee, ComfortDelGro, FHT and City Developments (please refer to table below for respective companies’ P&L and balance sheet exposure to the UK). 
  • Our discussions with these companies indicate a wait-and-see stance as the outcome of the referendum remains difficult to predict. 
  • In addition, these are long gestation investments and any major decision will be carefully considered. 
  • Maintain BUY on ComfortDelGro, Ho Bee, City Developments and FHT. 
  • For SIA (HOLD/Target S$11.60), Europe accounts for 9% of its group revenue but euro-denominated revenue is likely to be less than 4% of total revenue. Any negative impact could be partially offset by higher traffic to the region. In the near term, yields could fall, but medium-term impact would be negligible as SIA could hedge its exposure.

    Impact on Stocks from BREXIT - UOB Kay Hian 2016-06-15

 Sniper approach for FSSTI as opportunity arises on volatility. 

  • Our blended (PE cum P/B) target of 2,910 for the FSSTI implies a limited 5% upside. Hence, we think investors will need a “sniper” approach to outperform. We see intermittent bouts of market volatility from a potential Brexit, impending rate hikes, recovering oil prices and mixed macro data. This could provide attractive entry levels for patient and disciplined investors. 
  • While Brexit is not our base-case scenario at the moment, we would remain relatively defensive and position accordingly.

 Themes for 2H16 and key stocks for action. 

  • In our view, any significant pull-back is a potential buying opportunity. 
  • Key themes include: 
    1. M&A, 
    2. dividend yield with catalyst, 
    3. recovering tourist arrivals, and 
    4. going global. 
  • Large-cap BUYs include CDL, DBS, Singtel, ST Eng, A-REIT, CDREIT and Bumitama. 
  • Mid-cap gems include CAO, NeraTel, Valuetronics and Innovalues. 
  • SELL SIA Engineering, StarHub and M1.


UOB Kay Hian Key Recommendations 2016-06-15

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.30 Same 1.30
BUY Maintain BUY 1.56 Same 1.56
BUY Maintain BUY 10.36 Same 10.36