Singapore Strategy - UOB Kay Hian 2016-06-27: Union Jacked ~ Seeking Shelter

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STRATEGY – SINGAPORE: Union Jacked - Seeking Shelter

• In the aftermath of the Brexit, we suggest a list of stocks to seek shelter from further volatility.

WHAT’S NEW

• The second largest country in the EU has decided to exit and the market is now concerned about who will be next. The unfolding uncertainty has heightened the systemic risk and this is driving equity markets lower. 
• Based on the belief that markets will continue to be volatile, we recommend investors seek shelter in Singtel, ST Engineering, SPH, SATS, REITS and plantation companies. 
• We also highlight companies with broader exposure to Europe and also suggest stocks to seek shelter in.

ACTION

Safe-haven stocks to seek shelter in are dividend-yielding stocks such as Singtel, ST Engineering, SPH, SATS and selected REITs as well as plantation companies. 

• Within the REIT space, investors could potentially seek refuge in defensive REITs such PLIFE, AREIT, FCT and MIT - none of which have any exposure to Europe. 
• The same goes for the plantation sector, for which we maintain an OVERWEIGHT rating. Earnings are mainly driven by production and CPO prices and neither will be impacted by the Brexit. 
• While Europe is the third largest palm oil consuming country, demand has been relatively flat. On the contrary, if the US dollar strengthens, it will be positive for the sector as CPO trades largely in US dollars. Out top pick for the sector is Bumitama Agri for its best earnings growth among peers on the back of positive FFB and CPO production growth and higher selling prices for 2016 and 2017. We also continue to favour select mid-cap plays such as CAO, Nera Tel and Valuetronics.

Property & REIT’s exposure to UK/Europe: 

• Companies with significant exposure to the Eurozone under our coverage include Ho Bee (24% of GAV in UK), City Developments (12% of GAV in Europe, 11% in UK), ART (28% of GAV in Europe, 11% in UK), FHT (24% of GAV in Europe, 19% in UK). The impact on balance sheet is minimal for most companies due to their natural hedge. 
• On the income side, a 10% depreciation of the pound against the Singapore dollar will result in a 0.5-2.9% negative impact on earnings

Transportation companies with exposure to UK/Europe: 

• ComfortDelGro (CD) derives 25% of its revenue from Europe. Out of that, 88-90% is from the UK bus segment, of which’s revenue remains resilient. Aside from translation losses, there should be minimal impact to CD’s earnings. 
• For SIA, 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 from a weaker Euro could be partially offset by higher traffic to the region. In the near term, yields could fall, but the medium-term impact would be negligible as SIA could hedge its exposure.

Plantation companies have minimal exposure to Europe with Wilmar having just a 6.8% revenue exposure. 

• Plantation companies have minimal direct exposure to the UK or pound. The impact could largely come from its exposure in Europe which could see its euro currency negatively affected. This could have a marginal impact on Wilmar International due to its downstream operations in Europe. 
• Wilmar’s exposure in Europe mainly pertains to downstream processing for oilseeds and grains. The total asset exposure as at end-15 was at around 1.5% and 6.8% of 2015 revenues generated from Europe.

Themes for 2H16 and key stocks for action. 

• In our view, any significant pull-back is a potential buying opportunity. In the worst case, the FSSTI could head towards 1.1x P/B, or the 2,600 level. 
• Key themes which we will continue to focus on are: 
  1. M&As, 
  2. dividend yields 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.

TACTICAL RECOMMENDATIONS

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-27

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