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Liberum reflects on the consequences of an "aye" Scottish independence vote

It is not quite a case of "we're all doooooomed", but there will be some companies materially affected should Scotland secede from the union.


Broker Liberum reckons the sectors likely to be most affected should Scotland secede from the union would be utilities and defence.

With half an eye on the spread betting sites, which indicate that the chance of Scotland voting for full independence on 16 September has risen from 15% at the end of last year to 27% now, the broker has attempted to determine those companies most likely to suffer disruption from Scotland's secession.

In the aerospace & defence sector, Liberum notes that, given the potential requirement to move the nuclear deterrent and Royal Air Force south, and split the army, Westminster has warned that the Ministry of Defence may not place contracts in an independent Scotland.

This could have an impact on Rolls-Royce, which Liberum currently rates as a ‘buy’, Babcock (‘sell’) and QinetiQ (‘hold’).

Rolls-Royce (LON:RR.) has more than 2,100 workers in Scotland out of a total workforce of 55,000, and is planning to move its East Kilbride aero-engine operations to the Inchinnan plant near Glasgow by 2015.

Babcock (LON:BAB) directly employs nearly 4,800 people in Scotland, including more than 3,100 in its marine and technology division’s work at Clyde and Rosyth, while QinetiQ (LON:QQ.) employs more than 500 people across 11 locations in Scotland.

In addition to that trio, Liberum notes BAE Systems employs around 3,600 staff in Scotland, including 3,000 on naval ships mainly at Scotstoun and Govan, but also at Rosyth supporting the assembly of the Queen Elizabeth Class aircraft carriers, as well as employing staff at Hillend and at its regional aircraft division at Prestwick.

As for the utilities, the main areas of concern are the subsidies for renewable power and the stance of a new Scottish regulator to replace Ofgem.

“The bulk of onshore wind in the UK has been built in Scotland and the vast majority of the onshore pipeline is also in Scotland. Scotland is also home to many of the Round 3 offshore wind prospects. Currently support for renewables is paid for by all 27m UK households and 5m business organisations. Should Scotland secede from the UK the question is whether or not UK consumers would continue to provide subsidy payments to renewable assets in Scotland?” the broker asks.

Liberum identified SSE (LON:SSE) – formerly known as Scottish & Southern Energy – as particularly exposed to the Scottish independence issue, with its wind capacity in Scotland having an estimated book value of around £1.5bn.

“In 2016/17 we are currently forecasting a total revenue from SSE's onshore wind portfolio of £412mln, and total EBIT [underlying earnings] contribution of £188mln, which would account for c.11% of group EBIT. Of this some 80% comes from SSE's Scottish onshore wind activities (assume SSE continues with projects already under construction and with consents).

Therefore, we calculate that if all of SSE's Scottish onshore wind outputs are sold at the wholesale market price from 2016, it could bring up to 10% EPS downgrade for SSE in Mar17,” calculates Liberum’s Peter Atherton.

Outside of these sectors, Liberum thinks uncertainty over policy may slow investment in the oil & gas sector while in the retail sector the main issue would be the loss of sterling and the associated costs. Builders’ merchant Travis Perkins (LON:TPK) has a lot riding on the outcome, with 8% of its group sales coming from north of the border.

Quick facts: Rolls-Royce Holdings PLC

Price: 214.4 GBX

Market: LSE
Market Cap: £4.13 billion

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