Bank, telecom, retail sectors 'attractive'

The preferred stocks are Total Access Communication (DTAC), Kasikornbank and Tesco Lotus, the bank’s Equity Strategy Thailand report said last week.

HSBC likes banks because of their attractive valuations and solid balance sheets. For the six banks under its coverage, it is anticipating profit-before-tax growth of 11 per cent on year for the first quarter of this year, or 18 per cent due to the lower corporate tax rate. Earnings growth is driven by both loans and fees.

While loan growth may slow somewhat due to seasonal effects from repayments, SMEs and consumers continue to generate some demand, being the key loan drivers. On a year-on-year basis, loan growth is expected to have been robust at 11.5 per cent in Q1, higher than the full-year estimate of 10 per cent.

The telecom sector’s growth outlook remains attractive, thanks to the successful 3G-2.1GHz spectrum licence auction after years of delay, which enables operators to unlock further value as they shift from the current 25-30-per-cent concession fee to the theoretical 6-per-cent fee under the 2.1GHz licences.

Advanced Info Service and DTAC, both under HSBC’s coverage, are expecting to add 8 million-10 million 3G subscribers this year. A decision to use their existing 2G tower networks or build their own towers for 3G services will also be a crucial factor determining how cost-revenue relation plays for the telecoms in the coming years.

The underlying growth in Thailand’s retail sector remains strong. Its price-to-earnings valuations are about 30 per cent cheaper than the Indonesian retail sector. Increasing consumer confidence, low unemployment and higher wages are driving consumption across the region.

Thai banks are expected to show the biggest return-on-assets expansion in Asia over two years. KBank is set to deliver the widest expansion, due to its strong 15-16-per-cent annual fee income growth.

Transactional, bancassurance, and cash management and trade finance fees will likely remain key drivers of its already solid non-interest income platform. KBank is also moving to boost its market share in higher-yielding areas, such as the smaller SMEs, while gradually building up in the auto hire purchase and personal loan segments in order to improve its net interest margin.

KBank last week reported that its Q1 net profit at Bt10.11 billion. This was a rise from Bt8.98 billion in the same quarter last year, mainly on 13.25-per-cent growth in fee income, while its lending expanded by 2.2 per cent. The nine listed banks recorded Q1 net profit of Bt42.67 billion, up by 23.6 per cent from Bt34.53 billion year-on-year, thanks to a rise in non-interest income from the capital market. Despite slower loan growth in the quarter due to seasonal business cycles, banks, especially those with brokerage and fund-management arms, enjoyed higher earnings.

For DTAC, though its stock has outperformed the SET Index by 13.9 per cent in the last three months, HSBC believes it will re-rate further once cost savings from lower 3G licence costs are anticipated by the market or realised in the second half of this year. HSBC’s 2013-14 profit estimates of DTAC are 15-43 per cent above consensus, given the 3G cost savings and as wireless data revenue is expected to continue gaining momentum.

DTAC has room to sustain a 100-per-cent payout policy given an under-leveraged balance sheet.

In the retail sector, Tesco Lotus Retail Growth Freehold and Leasehold Property Fund stands to benefit from robust consumer trends. Its assets have a strong anchor tenant in the form of Tesco Lotus, a leading local hypermarket and shopping mall operator. The fund’s portfolio is also geographically diversified and has a diverse tenant base catering to a wide range of customers with high occupancy rates.

The fund has a large proportion of its assets on freehold land, which is a positive in an environment of rising land prices, as is the case now. These large assets can grow TLGF’s portfolio substantially in the medium to long term.