Strategy Singapore - UOB Kay Hian 2016-09-02: Assessing The Fallout From Zika


Strategy Singapore - Assessing The Fallout From Zika

  • We highlight stocks and sectors impacted by the recent Zika outbreak. 
  • Remain defensive on FSSTI on weak earnings visibility and lack of catalysts.


  • Acceleration in the number of new Zika virus cases and market implications. From only one confirmed case of Zika on 27 August, the number of infections has jumped to 151 as at 1 September. 
  • According to Bloomberg, Malaysia has also confirmed its first case of Zika infection of a woman who visited Singapore on 19 August. This report highlights the potential impact on FSSTI and how to position accordingly.


What is Zika? 

  • Zika virus is related to the dengue, yellow fever, Japanese encephalitis, and West Nile viruses. Zika virus infection in humans has been reported since 1950s and is transmitted by Aedes mosquito, identical to dengue. 
  • Zika often causes no or only mild symptoms, similar to a very mild form of dengue fever. There is no vaccine or specific anti-viral drugs for Zika.
  • In Asia, selected provinces in Thailand have seen outbreaks (defined as more than 10 cases, widespread transmission or with transmission for more than eight weeks). Indonesia and Vietnam have experienced a less severe ongoing local transmission.

Flashback to SARS and H1N1. 

  • In 2003 and 2009, Singapore was impacted by SARS and H1N1 (influenza A virus subtype H1N1) respectively. Tourism-related sectors will be hit as five countries including the US, UK, Taiwan, South Korea and Australia have already issue travel advisories, especially for pregnant ladies. 
  • During the last health scare in 2003 and 2009, tourists arrivals declined by 6-67%, with the impact particularly severe during SARS in Apr 03. Compared with Zika, we believe the impact from SARS and H1N1 is likely more serious due to higher fatality rates (9.6% for SARS, 1.2% for H1N1 and 0.01% for Zika) and the declaration of these diseases as a pandemic by World Health Organization (WHO).

Sectors with potential implication. 

  • Within our coverage, sectors impacted include hospitality, aviation, gaming, retail and healthcare. The impact will depend on the severity of the Zika cases and the period of the travel advisory or alert level.

Aviation; more downside risk for SATS on higher expectations built in. 

  • Even prior to the recent travel advisory warnings, the rate of growth at Changi Airport has been declining for the past three months. Any further erosion could lead to lower flights handled, pax handled and unit meals. We also believe the problem could be compounded by weak pricing for unit meals amid continued deflationary pressures as well as weak airline yields. 
  • Given that labour costs account for 57% of opex and have a substantial fixed component, any shortfall in volume would have detrimental impact on earnings.
  • Given the recent steep rise in stock price, we recommend top slicing SATS and switching into other defensives
  • While SIA is also likely to be impacted by weaker traffic, expectations of earnings recovery are already muted and we thus do not expect a steep decline in stock price. Almost half of SIA's pax traffic is based on resident outbound travel and we do not expect this segment to be impacted. Still, it is worth noting that SIA had warned of continued wage cost pressures, post an upward revision in pilots/cabin crew remuneration and thus, any sustained decline in traffic will impact SIA adversely.

Hospitality; near-term hit from Zika; prefer selected industrial plays. 

  • With Formula One round the corner, the impact on hospitality stocks could be severe if the Zika virus outbreak spirals out of control. As such, five countries (Taiwan, South Korea, Australia, UK, the US) have already issued travel warnings to Singapore. We prefer selected industrial and deep value REITs over hospitality plays with FLT, AREIT and KREIT as our top picks. 
  • In the hospitality space, we prefer geographically diversified hospitality stocks (ART, FHT) over Singapore-centric ones (CDREIT) given the Zika outbreak and supply-side headwinds. 
  • During the SARS outbreak, monthly visitor arrivals plunged 70% yoy in the three months following the outbreak before normalising. This resulted in a sharp 39- 42% yoy drop in monthly occupancies and 14-17% yoy drop in the room rates. 
  • During the outbreak of H1N1, the drop in the visitor arrivals was less severe at 13-15% yoy. The impact on hotel room rates and occupancies was quite muted (flattish) as the GFC had already taken a significant toll on the hotel operating performance.

Genting – Initial knee-jerk reaction but relatively resilient. 

  • GENS may be moderately impacted by lower tourist arrivals ( < 5% downside to gross gaming revenue). While we foresee an initially more significant knee-jerk fall in casino patronage from tourists, we also foresee Malaysian tourist patronage quickly clawing back. 
  • Meanwhile, we do not foresee Zika impacting VIP and local patronage. Maintain BUY and target price of S$0.84 which implies a target 9x 2017F EV/EBITDA.

Stay safe and selective on market. 

  • We remain selective on FSSTI as earnings outlook continues to be challenging, valuations appear fair and catalysts are lacking. In terms of P/B valuations, the FSSTI P/B of 1.09x is comparable to 1.03x during H1N1 and 1.08x during SARS. 
  • On a PE basis, FSSTI’s FY16F PE of 13.3x compares with 9.5x during H1N1 and 15.5x during SARS, but we note that valuation during H1Ni was impacted by the global financial crisis. 
  • Our current key picks are OCBC, ST Eng, Singtel, Venture, FLT,


UOB Kay Hian Valuation of Key Stock Recommendations 2016-08-18

Andrew Chow CFA | Singapore Research Team | http://research.uobkayhian.com/ 2016-09-02
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.37 Same 1.37
HOLD Maintain BUY 4.45 Same 4.45
BUY Maintain BUY 0.84 Same 0.84
BUY Maintain BUY 1.70 Same 1.70
HOLD Maintain HOLD 1.55 Same 1.55