Brexit New Zealand Fallout
The wake of the UK’s decision to depart from the European Union has rippled through financial markets
globally. The immediate moves in the local equity, bond and currency markets have not been dissimilar to
those offshore moves. We expect markets to take some time to settle as market adjustments could continue to reverberate locally. While a larger correction in equity markets a risk in the near term, the New Zealand market would seem reasonably positioned to recover from that over time.
Initially it appears as though any companies with an exposure to Europe/UK have been dumped by investors in panic mode. We would avoid the volatility of companies that have large revenue or profits derived from the Eurozone. We are also considering trimming or moderating positions that do have direct exposure to Europe/UK. In saying that, we believe that direct trade, investment and earnings consequences for New Zealand of Brexit are likely to be relatively modest for most NZX companies.
However, there are a number of NZ companies we own which are directly impacted by Brexit, the majority
being in the Tourism sector. According to the latest statistics, the UK and Europe make up 15% of the total visitor arrivals to NZ in the last 12 months to May 2016. Given the drop in the British Pound, and uncertainty in the European region, there is likely to be a drop in tourists from the region coming to NZ. NZ companies with global businesses, particularly with revenue exposures to Europe/UK are likely to be hurt given the potential for weaker UK and European GDP growth.
While it is too early to try and ascertain the impact on the stocks below given market volatility and general uncertainty around the Brexit process, we have highlighted stocks below which are likely to be affected. Over time as things become clearer we may look to change our investment views, and highlight the following Brexit risk stocks:
Auckland Airport (AIA.NZ)
Air New Zealand (AIR.NZ)
Tourism Holdings (THL.NZ)
Fisher & Paykel Healthcare (FPH.NZ)
Delegat’s (DGL.NZ)
Tourism Facing Stocks: (AIA / AIR / THL) – Likely Not as Bad as Feared
Given the drop in the British Pound, and uncertainty in the European region, there is likely to be a drop in tourists from the region coming to NZ. However, it is very early to say exactly what that drop-off may be.
To try to get a better understanding of the potential magnitude in the fall it is worth examining the latest tourism statistics to NZ. According to the latest statistics, the UK and Europe make up 15% of the total visitor arrivals to NZ in the last 12 months to May 2016 (as shown by the chart below). In fact, arrivals from the UK made up 6.4% of arrivals, following only Australia, China, and the US.
Recent trends in tourism have shown encouraging signs, in particular tourism growth from China continues to boom, up 27% versus last year, while other areas of Asia also go from strength to strength. This growth should somewhat buffer a downturn from Europe.
The UK itself only showed a 7.4% increase in tourism numbers for the 12 months to
May 2016, lower than the total visitor arrivals increase of 10.6%. A total 213,000 annual
visitors from the UK are currently arriving in NZ.
New Zealand tourism chief Chris Roberts has stated that “Tourism NZ don’t expect the
outcome of the Brexit vote to have a significant impact on New Zealand tourism”. It
should be pointed out that almost half of the visitors from the UK over the last 12
months (101,600) came to visit friends and relatives, and that market is relatively
resilient to any change in economic conditions or confidence. Further, the tourist
industry in NZ is expecting a windfall from next year’s Lions Rugby Tour which is expected to attract 20,000 fans.
Auckland Airport (AIA.NZ)
AIA provides airport facilities and supporting infrastructure in Auckland, New Zealand.
The Company earns revenue from aeronautical activities, on airport retail concessions
and car parking facilities, standalone investment properties and other charges and rents associated with operating an airport.
Exposure:
AIA is exposed to international passenger numbers, and while it has a diverse revenue
stream, the majority of its revenue is charged by landing fees for aircraft and service
charges for passengers. We have AIA on a HOLD recommendation based on valuation.
Recent positive earnings momentum for AIA has been driven by explosive growth from the Asian region (as discussed above).
Below highlights the positive annual trend in visitor arrivals to NZ. This may experience a drag from a drop in the total 213,000 annual visitors from the UK currently arriving in NZ, although other positive trends should remain in play, in our view.
Air New Zealand (AIR.NZ)
AIR is a New Zealand-based international and domestic airline company. AIR provides
transportation services for passengers and cargo services across New Zealand,
Australia and Pacific Islands, the United Kingdom and Europe, Asia and North America.
Exposure:
In a similar manner to AIA, AIR will be influenced by visitors to New Zealand. However,
as AIR is exposed more to international markets, on the flipside there could be an offset
with more New Zealanders travelling to the UK given weakness in the Pound makes the
UK a more attractive tourist destination.
According to some preliminary estimates, Airlines could suffer a drop-off in British
travellers of up to 5 per cent following the Brexit. The International Air Transport
Association says the full impact will not be clear for some time but air traffic will be
affected. However, as highlighted above there are many factors discussed above in
relation to NZ which could continue to support tourism and passengers travelling to
NZ. We will be watching developments closely.
Tourism Holdings (THL.NZ)
THL is engaged in the manufacture, rental and sale of motorhomes and other tourism
related activities, in New Zealand, Australia and the United States.
Exposure:
As with AIR & AIA, THL is exposed to tourism numbers to NZ, and any drop off in tourists from the UK or Europe.
At its recent update, THL noted that the outlook for the NZ tourism industry remains
positive in both the short and medium term. This was driven globally, as tourism
remains a high growth industry with emerging markets continuing to evolve and
traditional markets returning to new highs. In particular, THL noted that the USA and
UK continue to grow. Given these comments, we would expect continued growth from
Asian markets to provide some offset from any British and European declines.
Interestingly, the chart below highlights how the key growth area in tourism has been
people on holiday, which is key for THL’s business. The key growth area also remains
holiday-makers from the Asian region, which remains very much intact.
Fisher & Paykel Healthcare (FPH.NZ)
FPH designs, manufactures and markets products and systems for use in respiratory
care, acute care and the treatment of obstructive sleep apnea. The Company operates
in four segments: New Zealand, North America, Europe and Asia-Pacific. Its products
are sold in around 120 countries. FPH sells its products to hospitals, homecare
providers and other manufacturers of medical devices.
Exposure:
FPH sells goods globally, including to Europe. It has a presence in 36 countries and 258
employees currently in Europe. As of the 31 March 2016 financial year, 31% of FPH’s
revenue was generated out of Europe (with the remaining 47% from the US and 18%
from Asia Pacific).
29 June 2016
Clearly this a large portion of FPH’s revenue, and the risk is that Europe falls into a
downturn which impacts on demand for FPH’s goods in the regions. In saying that, it
should be kept in mind that FPH sells healthcare goods, which are generally defensive
in nature (given the requirement of healthcare products).
FPH is also exposed to a weaker currency in the European region as a result of Brexit.
However, the company has significant currency hedges in place which will offset the
movement in the shorter term:
Delegat’s (DGL.NZ)
DGL is a New Zealand-based producer of branded New Zealand wines for export and
domestic markets. As well as selling its wine in the NZ market, the company exports
overseas, with divisions in Europe, Australia, and the US.
Exposure:
DGL is showing good volume growth in all regions, and it is also investing into future
growth. Given recent developments, if a downturn were to occur in the UK it could
negatively influence demand for DGL’s goods in the region. As shown in the table below
sales to the UK and Europe make up approximately 30% of DGL’s total wine sales in
terms of number of cases. Further, a sustained drop in the pound relative to the NZ
dollar will mean the wine is selling at a lower price in NZ dollar terms, and further
negatively impact on DGL’s profitability.
DGL is arguably the most exposed of the NZ stocks discussed to the fallout from
Brexit.
Source: DGL Investor Presentation