Thailand equities — more positive signs

by FUNDSUPERMART RESEARCH ANALYST / pic by BLOOMBERG

In a recent piece on Thailand, we mentioned the kingdom still has some headroom for stronger growth from a macroeconomic perspective.

Its equity market, as represented by SET Index, clocked 1.02% return over the first quarter of 2018.

Thailand was among four equity markets under our coverage to finish the quarter in black amid concerns over US inflation and escalation of trade friction.

The SET Index captures all companies listed on the Thailand stock market.

As of March 30, there were a total of 581 listed companies in Thailand and the top 50 companies account for about 70% of total market capitalisation.

Financial and energy companies account for a third of total market capitalisation, while consumer staples, industrials and materials constitute high weightage in the SET Index. The newly drafted constitution in August 2016 gave the military veto power and investors have interpreted this as a positive sign of stability, evidenced by the bottoming of earnings estimates.

Earnings trend of companies have been showing signs of bottoming leading to equities trending higher.

Looking into the year-to-date (YTD) earnings revision figures, within telecommunications, True Corp pcl did most of the heavy lifting as analysts expected the company’s product convergence propositions to take place successfully, which would contribute positively to its service revenue.

Depreciation and amortisation charges, which have eaten into its profits in the previous fiscal years, are expected to see limited increase.

The company’s steady market share gains and robust revenue momentum has alleviated its earnings prospect. On average, telecommunication companies have their earnings revised upwards by 6.8% YTD.

Investors may rightly predict the strong earnings recovery of energy companies from higher oil prices, stronger demand for petrochemical products and a stronger balance sheet amid restructuring efforts during the commodity down cycle.

Oil and gas giants like PTT pcl and PTT Exploration and Production pcl have witnessed reord high net profits and earnings. On average, energy companies have their earnings revised upwards by 16.8% and 7.5% in FY17 and FY18 YTD respectively.

Materials-based companies like PTT Global Chemical pcl and IV have benefitted from the increased chemical prices and spreads.

In contrast, the outlook for cement companies wasn’t as bright as the profit margin remains compressed because of stiff competition and higher coal costs. Although there is a lot of ongoing infrastructure projects in Thailand, the disbursement of government funds has been slow, partly caused by land acquisition difficulties.

Until all this government spending kicks in, infrastructure is unlikely to give a big push to cement demand in 2018. Given its significant weightage, we would also like to take the opportunity to look into the financials. The earnings revision trend for the sector companies were generally mixed. Given loan growth picks up seasonally in the second half of 2018 (2H18), the earnings revision trend may start to look better in 2H18, where businesses normally take loans.

Analysts are in favour of institutions with solid balance sheet and consistent loan growth like Kasikornbank pcl and Bangkok Bank pcl, while earnings estimates were less encouraging for banks such as Bank of Ayudhya pcl, which is struggling with heavy loan loss provisions.

In its latest monetary policy meeting, one of the members of Bank of Thailand (BoT) was dissenting in favour of a rate hike (decision to keep rates on hold was unanimous for the past six meetings).

We do not foresee BoT hiking rates for the rest of the year despite rate hike moves by the US and by its peers in Malaysia and Indonesia. Keeping the policy rate on hold will help preserve the private spending recovery momentum and to achieve its inflation target.

The improved economic prospects have brought Thailand’s equity valuation nearing 17.5 times at the beginning of 2018.

Since then, Thai equities have experienced a correction amid US inflation talks and concerns of a trade war between China and US.

As of April 3, the price-toearnings ratio for FY18 and FY19 stood at 15.7 times and 14.2 times respectively, together with earnings growth of 11.4% and 9.9%.

Our fair PE value for the SET Index is 14 times.

The premium value of the SET Index makes it susceptible to valuation contraction. However, the robust earnings growth of Thai companies will continue to lend support.

Should the government expenditure kicks in as scheduled and general elections held as planned, we see further potential for upward revision in earnings.